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The Associated Press November 1, 2011, 8:22PM ET

Greek government in chaos with debt deal in doubt

The Greek government teetered and stock markets around the world plummeted Tuesday after a hard-won European plan to save the Greek economy was suddenly thrown into doubt by the prospect of a public vote.

One day after Prime Minister George Papandreou stunned Europe by calling for a referendum, the ripples reached from Athens, where some of his own lawmakers rebelled, to Wall Street, where the Dow Jones Industrial Average plunged almost 300 points.

Papandreou convened his ministers Tuesday night and insisted his decision to call for a referendum on Greece's place in Europe -- which would be the first since Greeks voted to abolish the monarchy in 1974 -- was right.

"We will not implement any program by force, but only with the consent of the Greek people," Papandreou said. "This is our democratic tradition and we demand that it is also respected abroad. And I believe it will be respected."

Papandreou said the Greek people were being called on to determine whether or not they wanted the new deal and to remain in the euro currency used by 17 European Union nations.

"The dilemma is not 'this government or another one', the dilemma is 'yes or no to the agreement', 'yes or no to Europe', 'yes or no to the euro,'" he said.

Papandreou acknowledged there would be adverse market reaction, but said the turmoil would be temporary.

The only other option, he said, would have been to hold early elections, which would have been "an avoidance of our responsibilities."

Papandreou has also called a vote of confidence in his government, to be held midnight Friday.

"The government is not falling," insisted Angelos Tolkas, a deputy government spokesman.

Under a recently amended law, a referendum can be called on issues of grave national concern, but needs approval by an absolute majority in the 300-member parliament.

With several of his lawmakers rebelling, it was unclear whether Papandreou would have enough support to push the idea through. One, Milena Apostolaki, went as far as defecting, leaving the governing Socialists with a slim majority of just two seats in parliament.

Apostolaki's departure "shows clearly that the government itself is losing gradually its cohesion," said George Tzogopoulos, a political analyst from the Hellenic Foundation for European and Foreign Policy.

Although Papandreou had not set a specific date for the referendum, ministers indicated it would likely be held in January.

Papandreou's decision could upend a deal that was the product of months of work by European leaders who were trying, sometimes opposed by their own people, to agree on the details of a second bailout for Greece and shore up their own economies in the name of saving the euro, the common currency.

The deal would require banks holding Greek government bonds to accept 50 percent losses and provide Greece with about $140 billion in rescue loans from European nations and the International Monetary Fund.

But Greeks have been outraged by repeated rounds of tax increases and salary and pension cuts imposed as the government struggles to meet the conditions of a first, $153 billion bailout the country has been relying on since May 2010. With Greece facing a fourth year of recession next year, unions have held frequent strikes, and protests have often degenerated into riots.

A Greek rejection of the second rescue package could cause European bank failures and perhaps a new recession in Europe, the market for 20 percent of American exports. It could also cause Greece to leave the alliance of 17 nations that use the euro.

European leaders made no secret of their displeasure.

"This announcement surprised all of Europe," said a clearly annoyed French President Nicolas Sarkozy, who has been scrambling to save face for Europe before he hosts leaders of the Group of 20 major world economies later this week.

"Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts," he said.

French lawmaker Christian Estrosi was even more direct. He told France-Info radio that the move was "totally irresponsible" and reflected "a wind of panic" blowing on Papandreou and his party.

"I want to tell the Greek government that when you are in a situation of crisis, and others want to help you, it is insulting to try to save your skin instead of assuming your responsibilities," Estrosi said.

Sarkozy and German Chancellor Angela Merkel, who have been at the forefront of Europe's efforts to contain the national debt crisis, talked by phone and agreed to convene emergency talks Wednesday in Cannes, France, to which Papandreou was also summoned.

Merkel also spoke by telephone Tuesday with Papandreou, his office said.

Jean-Claude Juncker, who chairs eurozone ministerial meetings, said the referendum was a dangerous decision that could endanger Greece's next installment of bailout loans -- without which the country will run out of money in mid-November.

The market response was brutal, especially in Europe. Greece's general price index plunged to close down 6.92 percent, while in Germany the Dax index, the major stock market average, lost 5 percent -- the equivalent of about 600 points on the Dow. The French stock market closed down 5.4 percent, the Italian 6.7 percent and London 2.2 percent.

"Talk about your all-time bonehead moves," said Benjamin Reitzes, an analyst at BMO Capital Markets.

In New York, the stocks of major banks like Citigroup and JPMorgan Chase were hit hard. The value of the dollar rose, and bond prices jumped so dramatically that analysts said they were stunned.

Analysts said the bond action reflected fears that the turmoil in Greece would tear at the fabric of Europe's financial system and create a crisis that could engulf the entire European Union, which together forms the world's largest economy.

"This brings all of the concerns about Europe back to the front burner," said Scott Brown, chief economist at Raymond James. "If this ends up turning into a financial catastrophe in Europe, then no one will escape it."

Papandreou's decision was such a surprise that even the finance minister, Evangelos Venizelos, apparently did not know about it ahead of time. He was unable to make the ministers' meeting Tuesday after being hospitalized with stomach pains. He was to remain in the clinic overnight.

The main opposition conservatives called for Papandreou's resignation. But criticism was also intense from Papandreou's own Socialists, who have been clinging to a shrinking parliamentary majority.

"Yesterday's surprise and irrational announcement of the referendum has led me to doubt something that I considered certain until yesterday: That I am a member of a group that is striving to save our country from bankruptcy," Socialist deputy Hara Kefalidou said.

"I cannot back a referendum which is a subterfuge by a government that appears unwilling to govern."


Derek Gatopoulos, Nicholas Paphitis and Theodora Tongas in Athens, Angela Charlton in Paris, Raf Casert in Brussels and David McHugh in Berlin contributed to this report.

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