The European Union flag flies over Athens on Tuesday as E.U. officials struggled to come up with a definitive solution to Greece's debt woes. (Petros Giannakouris/AP)

But this morning, everything was thrown into flux: Markets collapsed at the news that Greek Prime Minister George Papandreou had called for a voter referendum on Greece’s participation in the bailout package. Papandreou’s move took the markets, as well as many close observers of Greece, by complete surprise.

“One of the things being reported in the Greek press is that even key cabinet members had no idea that this was coming,” said Kevin Featherstone, professor of contemporary Greek studies at the London School of Economics’ European Institute, who has written extensively on the Greek debt crisis. “Reportedly, even the economics minister did not know he was going to suddenly announce a referendum.”

Earlier this afternoon, I spoke with Featherstone about what the call for a referendum means, why it might not happen, and how, within hours, the Greek government could potentially collapse. What follows is a transcript of our interview, edited for length and clarity.

Sarah Kliff: The markets are pretty freaked out right now. Where does Papandreou’s call for a referendum leave us?

Kevin Featherstone: At the moment, we could be hours from the collapse of the Greek government. It’s never boring. Or if not hours, next days, couple of weeks. . . . At this moment, I’d say the odds that the Greek government survives are 50-50.

SK: Hours? Walk me through that scenario, how we could see a collapse so soon.

KF: At this moment, literally, there’s a cabinet meeting. We’re not clear whether the cabinet officials will follow Papandreou’s call for a referendum. We’re already seeing some public calls from within the party for him to resign as leader. If that happens, that could trigger a fresh election.

Another trigger is that the members of the main opposition party could resign en masse, which would make the government unworkable. It’s quite possible that the opposition leader, Antonis Samaras, could say the proposal is reckless and endangers the country, and demand fresh elections to resolve this.

SK: Let’s say an election does get triggered. What does that mean for the referendum?

KF: Since it’s quite possible that the governing party could implode in the next hours, or days, that would mean an election in about three weeks. While all the media reports make it seem very immediate, the referendum actually wouldn’t be held until January. So an election gets rid of the referendum.

An election campaign with all the emotion and heat of a very painful, difficult system would be tremendously destabilizing for the eurozone.

SK: Back to the referendum — if that happens, do you think it would pass? Would Greeks vote against the debt deal from last week?

KF: Many are citing a recent opinion poll that shows about 60 percent of the Greek public is against last week’s deal. If you take the most recent, you’d guess the referendum is going to go against.

However, my interpretation is that the referendum would be about three months away, which leaves plenty of time for a more focused campaign. I’m sure the people advocating a “yes” vote would warn the Greek public:‘Don’t play with voting no. If you vote no, could be expelled not only from the single currency but from the European Union.’ There are other opinion polls that say the Greeks remain in overwhelming favor of being part of the currency and the European Union.

SK: Most media reports I’ve read describe the referendum as a vote on last week’s debt deal. But from the way you describe it, there’s actually a lot more at stake.

KF: What Papandreou has proposed is asking the Greek voters to say yes or no on whether Greece should accept the deal from last week. But everyone appreciates there are much bigger implications. A no vote in the referendum would quite possibly be cataclysmic for the single currency and bring into question whether Greece could continue in the European Union as a member state.

SK: So we’re either facing an incredibly damaging, near-term election or a potentially cataclysmic referendum. Is there a best-case scenario here?

KF: If forced to choose between two difficult alternatives, I think the referendum would be better — the outcome is likely to show fairly strong pro-European unity. The worst path is an early election. But these are not ideal alternatives.