Greece is to hold a referendum on whether to accept the rescue package from the European Commission, European Central Bank and International Monetary Fund troika.
George Papandreou has announced that there will be a Greek referendum to approve the EU bail-out deal which would impose a 50pc haircut on its creditors Photo: REUTERS/Francois Lenoir
Responding to the riots that followed last week’s proposal, as well as dissent from within his own Socialist party, Prime Minister George Papandreou said: “The command of the Greek people will bind us. Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted.”
Staging a referendum, reportedly to be held in January, threatens to throw the eurozone further into crisis as the majority of Greeks object to the bail-out, according to a survey published last week.
If Greece were to reject the plan, which requires deep spending cuts, it would risk a full-scale default and possible ejection from the euro. The country could even run out of money to pay civil servants or state pensions if the troika decided to pull the plug.
The decision by the embattled Mr Papandreou has the potential to be a major blow to efforts by German chancellor Angela Merkel and French President Nicolas Sarkozy to tame a crisis that most economists expect to push Europe back into recession in coming months.
The move is also likely to rattle investors whose initial euphoric reaction to last week’s agreement in Brussels has been replaced with a scepticism over whether European governments, including those of Greece and Italy, will be able to drive through the tough austerity measures demanded by the agreements.
The deal that European leaders and the IMF struck last week would see banks take a 50pc writedown on Greek loans, cutting the country’s debt by up to €100bn, alongside a €130bn international rescue effort on top of the existing €110bn package. No dates have been set for the referendum, which would include a confidence vote in the government.
“Heightened Greek uncertainty could propagate to other fragile euro countries, in particular Italy,” said Thomas Costerg, an economist at Standard Chartered Bank.
Mr Papandreou’s move is a high-stakes gamble designed to win greater legitimacy for austerity that’s proving deeply unpopular in a country where the economy is already forecast to shrink 5.5pc this year.
While polls show a majority of Greek voters see last week’s rescue package as a “negative”, they also signal that most would like to stay in the euro.
“I can no longer look at polls where the majority is against the agreement, the majority is against the programme, but a majority is also in favour of staying in the euro,” Evangelos Venizelos, the Greek finance minister, said on Monday.
Meanwhile, Willem Buiter, chief economist at Citigroup has called for the EU bail-out fund to be increased to €3 trillion. Writing in the Financial Times, Mr Buiter said that "the €1 trillion figure bandied around ... assumes that a 20pc or 25pc first loss guarantee would reduce Italian and Spanish borrowing costs on new debt issues to sustainable levels. It would not."
“Heightened Greek uncertainty could propagate to other fragile euro countries, in particular Italy,” said Thomas Costerg, an economist at Standard Chartered Bank.
Mr Papandreou’s move is a high-stakes gamble designed to win greater legitimacy for austerity that’s proving deeply unpopular in a country where the economy is already forecast to shrink 5.5pc this year.
While polls show a majority of Greek voters see last week’s rescue package as a “negative”, they also signal that most would like to stay in the euro.
“I can no longer look at polls where the majority is against the agreement, the majority is against the programme, but a majority is also in favour of staying in the euro,” Evangelos Venizelos, the Greek finance minister, said on Monday.
Meanwhile, Willem Buiter, chief economist at Citigroup has called for the EU bail-out fund to be increased to €3 trillion. Writing in the Financial Times, Mr Buiter said that "the €1 trillion figure bandied around ... assumes that a 20pc or 25pc first loss guarantee would reduce Italian and Spanish borrowing costs on new debt issues to sustainable levels. It would not."
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