Greek prime minister throws eurozone bailout into crisis by calling for a referendum

Prime Minister George Papandreou’s shock announcement that he will put Greece’s bailout to a referendum threatened to intensify the euro zone crisis, and brought complaints in Germany that Athens is trying to wriggle out of the deal.

Euro zone leaders agreed last week to hand Athens a second, 130 billion-euro ($179 billion) bailout and a 50-percent write-down on its huge debt. The price of the package is a program of harsh state spending cuts that have unleashed a tide of anger among Greeks.

Papandreou, whose ruling Socialist party has suffered several defections as it pushes waves of austerity measures through parliament while protesters rally outside, said he needed wider political backing for the fiscal measures and structural reforms demanded by international lenders.

A leader in German Chancellor Angela Merkel’s center-right coalition said on Tuesday he was “irritated” by Papandreou’s announcement.

“This sounds to me like someone is trying to wriggle out of what was agreed – a strange thing to do,” said Rainer Bruederle, parliamentary floor leader for the Free Democrats.

“One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and if it doesn’t fulfill the agreements, then the point will have been reached where the money is turned off.”

Analysts said the latest opinion poll showed a majority of Greeks took a negative view of the bailout deal.

The renewed uncertainty will be likely be an embarrassment for G20 leaders in France this week trying to coax China into throwing the euro zone a financial lifeline.

“If there was to be a referendum, we may reasonably conclude that they may not accept the austerity measures. We may conclude that it will bring the pack of cards tumbling down,” Howard Wheeldon, senior strategist at BGC Partners in London, said.

Early reactions to the surprise move ranged from accusations that Papandreou was gambling with the country’s future and predictions of default, to questions over the legality of the referendum and statements by lawmakers that a “No” vote would force his resignation and early elections.

Nobel prize-winning economist Christopher Pissarides caught the mood of uncertainty: “It is difficult to predict what will happen to Greece if they reject it. It will be bad enough for the European Union and the euro zone in particular, but it will be far worse for Greece.

“In the scenario of a ‘No’ vote Greece would declare bankruptcy immediately, they would default immediately. I can’t see them staying within the euro,” he said.

“The situation is so tight that basically it would be a vote over their euro membership,” Finland’s Europe Minister Alexander Stubb told broadcaster MTV3.

Greek Finance Minister Evangelos Venizelos also warned citizens that euro zone membership was at stake.

“It’s crunch time,” he told lawmakers on Monday. “Citizens will have to answer the question: are we for Europe, the eurozone and the euro?”
Early on Tuesday, Venizelos checked into an Athens hospital with stomach pains but was expected to be discharged later.

Analysts were divided over whether Greek voters would accept the deal, but agreed that a damaging month or two of market volatility lay ahead while pollsters repeatedly took the Greek voters’ pulse and European leaders looked on nervously.

The immediate market reaction to the announcement was negative, the euro extending losses against the dollar and tumbling more than 2 percent to a session low.