Greek cabinet backs PM’s surprise referendum decision

George Papandreou

ATHENS, (Reuters) – Greece’s cabinet decided early today to back Prime Minister George Papandreou’s proposal  for a referendum on a European Union aid deal, a government  spokesman said.

George Papandreou

“The cabinet expressed its support,” said government  spokesman Elias Mossialos. “The referendum will take place as  soon as possible, right after the basics of the bailout deal are  formulated.”

Some ministers leaving the 7-hour cabinet meeting said they  had expressed criticism of the decision but decided to support  the government ahead of a key confidence vote in parliament.

Caught unawares by his high-risk gamble, the leaders of  France and Germany summoned Papandreou to crisis talks in Cannes  today to push for a quick implementation of Greece’s new  bailout deal ahead of a summit of the G20 major world economies.

Six senior members of the ruling PASOK socialist party,  angered by his decision to call a plebiscite on the 130 billion  euro rescue package agreed only last week, said Papandreou  should make way for “a politically legitimate” administration.

A leading PASOK lawmaker quit the party, narrowing  Papandreou’s already slim parliamentary majority, and two others  said Greece needed a government of national unity followed by  snap elections, which the opposition also demanded.

Euro zone leaders thrashed out Greece’s second financial  rescue since last year, in return for yet more austerity, in the  hope that it would ease uncertainty surrounding the future of  the 17-nation single currency.

Instead, financial markets suffered another bout of turmoil  yesterday due to the new political uncertainty and the risk  that long suffering Greeks may reject the bailout.

The euro fell nearly three cents against the dollar  and the risk premium on Italian bonds over safe-haven German  Bunds hit a euro lifetime high, raising Rome’s borrowing costs  to levels that proved unsustainable for Ireland and Portugal.

European bank shares dived and the Athens Stock Exchange  suffered its biggest daily drop since October 2008, with the  general index shedding 7.7 percent.

INCREDULITY       

European politicians expressed incredulity at Papandreou’s  announcement on Monday evening that took everyone by surprise,  including his own finance minister.

“It’s difficult to see what the referendum is going to be  about. Do we want to be saved or not? Is that the question?”  Swedish Foreign Minister Carl Bildt said.

In a statement issued after French President Nicolas Sarkozy  and German Chancellor Angela Merkel conferred by telephone,  Sarkozy’s office said: “France and Germany are determined to  ensure, with their European partners, the full implementation in  the quickest time frame, the decisions adopted at the summit,  which are today more important than ever.”

The renewed uncertainty is likely to embarrass G20 host  France as it tries to coax China into throwing the euro zone a  financial lifeline.

Business executives in Greece expressed despair at how the  country was being run and markets speculated on whether Italy  will be the next euro zone country to slide into a debt crisis.

Jean-Claude Juncker, who chairs meetings of euro zone  finance ministers, refused to rule out a Greek debt default.

“The Greek prime minister has taken this decision without  talking it through with his European colleagues,” he said in  Luxembourg.

Asked whether a Greeks “no” vote would mean bankruptcy for  Greece, Juncker responded: “I cannot exclude that this would be  the case, but it depends on how exactly the question is  formulated and on what exactly the Greeks people will vote on.”

DEFECTIONS       

Papandreou, whose party has suffered several defections as  it pushes waves of austerity through parliament despite mass  protests, said he needed wider political backing for the budget  cuts and structural reforms demanded by international lenders.

But his problems deepened dramatically after the  announcement.

The conservative opposition called for snap elections.  “Elections are a national necessity,” opposition New Democracy  party leader Antonis Samaras told reporters.