Greek government teeters on brink of collapse in wake of referendum plan

France and Germany battle to save the single currency as Europe is plunged back into turmoil days after rescue deal

the Guardian,

1 November, 2011,

The French president Nicolas Sarkozy and German chancellor Angela Merkel will hold emergency talks on Wednesday in a desperate attempt to hold the eurozone together and formulate a response to the Greek prime minister's plan for a referendum on the austerity measures imposed by his European partners.

George Papandreou's socialist government was on the brink of collapse after his referendum plan sparked a furious reaction within his own party and plunged Europe back into turmoil, only days after a complex rescue deal had been agreed – requiring Greece to embark on tough new cost-cutting measures.

One MP quit Papandreou's Pasok party in disgust at the referendum move and several colleagues immediately said that, without a reversal, they would join him. Papandreou faces a crucial vote of confidence on Friday. A split in the Pasok party would almost certainly bring down the Greek government, which now has a majority of just two in the Greek parliament.

Amid gyrations on financial markets worldwide, Papandreou met angry party members to discuss their concerns, despite announcing on Monday that a referendum was the only way to overcome public opposition to the public spending cuts agreed as part of the eurozone rescue package.

The Greek finance minister, Evangelos Venizelos, who was rushed to hospital before the Monday meeting, said Papendreou had kept him in the dark over his plan to announce a referendum.

Stock markets reacted with alarm to the prospect that the €1tn deal to rescue the euro currency union was in danger of collapse. The FTSE 100 finished down 2.2% at 5421 after an initial fall of 5%. The German Dax index and French Cac remained 5% down at the close, while the Dow Jones index of US companies closed down by almost 300 points – 2.48%.

Sarkozy and Merkel have arranged a meeting on Wednesday eveningwith officials from the European Union and International Monetary Fund, which has already lent money to Greece and is involved in talks about further rescue funds.

The meeting will take place in Cannes hours before both leaders are due to meet President Barack Obama, who is flying to France for the G20 summit, which begins on Thursday. Obama wants the eurozone countries to end the uncertainty and agree a sustainable financial package.

Italy is widely seen as the most vulnerable, after Greece, to a lending boycott by international investors, after a series of broken pledges by the prime minister, Silvio Berlusconi. The Italian president, Giorgio Napolitano, added to the febrile atmosphere by saying it was his duty to verify whether the conditions were in place for reforms to be implemented. The statement, couched in highly formal terms, appeared to indicate that Napolitano was considering a new government, with representatives from outside Berlusconi's centre-right coalition.

German officials, visibly angry at the prospect of a referendum, said a no vote could plunge Greece into bankruptcy and force it out of the eurozone. German newspapers asked if the German government, which has committed the largest contribution to the bailout fund, should maintain its support.

Michael Roth, Europe spokesman for the opposition Social Democrats in Berlin, said Papandreou's move showed courage but he was "playing with fire".

He said: "If the Greeks are not ready to support Papandreou's reforms, Greece faces an uncertain future in Europe."

The rescue deal that Papandreou now intends to put to the vote will allow Greece access to €130bn of extra funds needed to maintain public spending and pay wages following a 50% write-off of its debts.

A €1tn firewall of insurances and guarantees is also intended to protect Italy and Spain from any panic by international lenders over their solvency.

Greek unions have held general strikes to protest at austerity measures that form part of the agreement, which include widespread public sector spending cuts and reductions in wages and pensions. The Greek government is also expected to sell off airports and utility companies.

A poll at the weekend showed nearly 60% of Greeks had a negative or partly negative view of the rescue.

Norbert Barthle, of Merkel's Christian Democrats, said the referendum call put a big question mark around the aid package, complicating plans to get banks to accept 50% -percent losses on their Greek debt holdings.

Greece is due to receive €8bn aid in mid-November, but is likely to run out of cash again in January, around the time of the referendum. Countries such as Germany, Finland and the Netherlands may find it difficult to defend funnelling more cash to Athens over the coming months with the threat of the referendum looming.

The Dutch opposition Labour Party described Papandreou's gambit as a "deal breaker" that would doom parliamentary approval of the latest rescue measures.

However, German Eurosceptics welcomed Papandreou's announcement, saying it was time European voters were consulted on what some Berlin parliamentarians believe is a doomed policy of never-ending bailouts.

"I think it's good, because you can't keep carrying out policies against the will of the people, it won't work," ruling Free Democrat lawmaker Frank Schaeffler told Reuters. "In Greece and in Germany we are making the mistake of not consulting the population enough in this process. I fear that the Greek people will speak out against these measures because they haven't been consulted, which will mean the collapse of this debt bailout logic."

Other experts described the announcement as poorly thought-out and warned that the consequences could drag down the entire 17-member currency bloc.

Here's What's About To Happen To The Greek Government...

Business Insider,

Nov. 1, 2011, 11:35 AM

Confusion continues to mount over the implications of Greek PM George Papandreou's call for a referendum on the most recent Greek bailout.

One source on the ground — a Greek trader — says this new proposal is bound to unseat Greece's government.

He writes:

I believe the present government will be history by the end of this week. Most probably this evening actually, when the already scheduled emergency cabinet meeting is to be held.

The important question to be resolved is whether the present government will be replaced by an interim national unity government for several months ratifying in parliament the Eurogroup decisions of last week and then proceeding with elections, or else whether national elections will be immediately announced with probable dates the 4th or 11th of December.