Papandreou decision to hold referendum

Greek surprise sends shock waves through markets

Athens, Greece (CNN) -- Stock markets in the United States and Europe dropped dramatically Tuesday after Greek Prime Minister George Papandreou stunned the world by calling a national referendum on international aid for his country.

A "No" vote could theoretically force Greece to crash out of the euro and send shock waves through the global financial system.

Papandreou is seeking public backing for the bail-out deal, which took months to hammer out.

But French President Nicolas Sarkozy and German Chancellor Angela Merkel issued a terse statement Tuesday saying they were "determined to ensure the full implementation, without delay, of decisions adopted by the summit, which are necessary now more than ever."

The agreement would see the country's sky-high debts cut in half, but it comes with strings attached which have led to angry demonstrations in the streets of Greece.

International lenders are demanding that Athens raise taxes, sell off state-owned companies, and slash government spending -- which means firing tens of thousands of state workers.

German and French markets were down about 5% in afternoon trading Tuesday, and the Dow Jones index plunged more than 250 points at the opening before recovering slightly, then falling further.

The announcement of the referendum rattled Papandreou's hold on power Tuesday, as a lawmaker defected from his party, leaving him with a majority of only two in Parliament.

Milena Apostolaki announced her resignation from the PASOK party, saying the call for a referendum was "a deeply divisive procedure."

The European debt crisis claimed its first American victim shortly before Papandreou announced the referendum on Monday, as MF Global filed for bankruptcy protection, leaving top Wall Street creditors holding more than $2 billion in debt.

The commodities and derivatives broker was run by ex-Sen. Jon Corzine, a former head of Goldman Sachs.

Greece's opposition leader Antonis Samaras called for a snap election Tuesday, but it is unlikely he has the votes to force one.

Papandreou has called for a vote of confidence later this week, separate from his call for a referendum on the international bail-out.

Constantine Michalos, chairman of the Athens Chamber of Commerce, told CNN Papandreou's referendum move had taken everyone by surprise, both locally and internationally.

As a consequence, he said, "Greece is facing a credibility gap as a result of the problems that have been created both on a political level and on a financial market level."

Michalos also said he saw little point in Papandreou holding a confidence vote this week, if the bail-out deal -- which was reached after top-level negotiations in Europe -- could be overturned by the Greek people just a few weeks later.

One expert called the surprise plan for a referendum "a political gamble which adds further uncertainty to the European debt crisis."

"The prime minister will be hoping for a vote in favor to strengthen his mandate, but if the Greek population votes against, it will leave the IMF and Greece's European partners in a very difficult situation," said Gary Jenkins of Evolution Securities.

The planned referendum casts a shadow on a hard-fought deal that would allow Greece to write off as much as 50% of its debts to banks.

The agreement for private lenders to scrap half of Greece's debt is worth 100 billion euros to Athens, and comes along with a promise of 30 billion euros from the public sector to help pay off some of the remaining debts, making the whole deal worth 130 billion euros ($178 billion).

No date has been set on the vote, although local news reports say the referendum could come in January. A "no" vote threatens to unravel the deal, which was greeted with fanfare last week as a way to keep debt woes in Greece and other European nations from spilling across other borders, threatening the 17 nations united under the euro currency.

A weekend survey in Greece found nearly 60% opposed the debt deal reached in Brussels last week.

But other surveys have shown a more complicated picture.

A survey by Kappa Research for the newspaper To Vima last week showed a majority of Greeks wanted a referendum on the international rescue plan, and that more would oppose it than accept it.

But in the same survey, 70% of Greeks wanted to stay in the euro, according to RBS European Economics -- a result that may not be possible if they vote "no" on the referendum.

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"(It) clearly opens a can of worms because the referendum vote could go one of two ways," said Frederic Neumann, a senior economist for HSBC.

"If approved, a vote of confidence in government's handling of the situation ... if calmer heads prevail and it can rationally be explained to the public, I wouldn't discount the measure being approved.

"The problems for the markets, until the referendum is passed, there is added uncertainty. That's just an added headache."

Besides the Greek debt reduction plan, last week's European Union deal pledged to quadruple the EU's bailout fund to about $1.38 trillion and raise the capital required to help cushion the region's banks from financial shocks.