Greek government won't back down on debt vote

ATHENS�? The leaders of France and Germany scrambled on Tuesday to limit damage after Prime Minister George Papandreou decided to let Greeks vote on a bailout package ? a move that stunned markets and threw Greece's euro zone membership into question.

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Two Socialist lawmakers revolted over their prime minister's shocking referendum decision, with one defecting from the governing party and another openly calling for an early election.

Lawmaker Milena Apostolaki broke away from the party to declare herself an independent, leaving the Socialists with a razor-thin majority of two seats in the 300-member legislature.

Papandreou's unexpected decision late Monday led to markets plunging on fears that Europe's plan to save the euro will unravel. He has not set a specific question, or a date, for the referendum, although ministers said it is expected to be held early next year. He has also called a confidence vote in his government on Friday.

This would be the first referendum to be held in Greece since 1974, when Greeks were called on to decide whether they wanted to keep the monarchy after the fall of a seven-year dictatorship.

The move allows the Socialists ? who have been vilified by an increasingly hostile public during months of strikes, sit-ins and violent protests over rounds of austerity measures ? to pass the responsibility for the country's fate onto the Greek people themselves.

In a sign of deepening political turmoil, another prominent Socialist deputy, Vasso Papandreou, called on the country's president to convene the heads of all political parties to create a cross-party government in order to safeguard the European debt deal. As soon as that is done, she said, early elections should be held.

"The country is in danger of immediate bankruptcy," Vasso Papandreou, who is not related to the prime minister, told reporters outside parliament.

Wall Street dives on European debt worries

'A lot of annoyance'
European politicians complained Athens was trying to wriggle out of the 130 billion-euro rescue deal agreed at a summit only last week, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union of the referendum.

Ireland, which itself took a bailout, attacked Papandreou's idea.

"The summit last week was to deal with the uncertainty in the euro zone...and this grenade is thrown in just a few short days later,'' European affairs minister Lucinda Creighton said.

"Legitimately there is going to be a lot of annoyance about it,'' she told Reuters.

Financial markets, which had calmed down after euro zone leaders agreed the second Greek bailout, took Papandreou's bombshell badly.

Shares in banks dived, investors fled to the safety of German bonds and Italian borrowing costs climbed despite European Central Bank action. Investors speculated that Italy might follow a similar path.

French President Nicolas Sarkozy will call German Chancellor Angela Merkel on Tuesday, his office said, while emotions ran high in Greece itself about the referendum idea.

"They must be crazy... this is no way to run a country,'' said the senior executive of one of Greece's biggest firms, speaking on condition of anonymity.

One senior German parliamentarian suggested the euro zone might cast Athens adrift, cutting off its aid lifeline and allowing the nation to default on its huge debts.

"This sounds to me like someone is trying to wriggle out of what was agreed ? a strange thing to do,'' said Rainer Bruederle, a leader in Merkel's coalition.

Bruederle, parliamentary floor leader for the Free Democrats and a former German economy minister, said he was irritated by Papandreou's announcement.

Europe would have to consider turning off the flow of money which is keeping Greece afloat, he told Deutschlandfunk radio.

"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 fulfil the agreements, then the point will have been reached where the money is turned off,'' he said.

Others were stunned by Papandreou's apparent bolt from the blue on Monday on the plan, which includes a 50-percent write-down on Greece's debts but has unleashed fury among Greeks due to its price ? yet more austerity.

But they also urged caution as the exact question to be put to the Greek people and the date for the vote remains unknown.

EU officials had yet to be officially notified of the poll.

Investors scurry
On the markets, players scurried for safer investments, hammering stocks and punishing the euro.

"The referendum is a bad idea with a bad timing. The post-summit rally is over,'' said Lionel Jardin, head of institutional sales at Assya Capital, in Paris.

The FTSEurofirst 300 index of top European shares was down 3.3 percent, due not only to the possibility of a disorderly Greek default but chaos surrounding the euro zone's attempts to stop the debt crisis spreading to more significant economies such as Italy.

Euro zone banks exposed to Greece and Europe's bigger, troubled economies, suffered particularly. Shares in Italy's UniCredit dived 12.6 percent and France's Credit Agricole was down almost 10 percent.

Andrew Lim, banking analyst at Espirito Santo in London, said that a Greek "no'' vote could trigger a "hard default'', forcing banks to take losses of about 75 percent on their Greek sovereign bonds and raising the threat of a systemic risk.

"If we get a hard default in Greece, it will exacerbate the situation with Italy and Spain. It just increases the problem of Italy going down the same route, and that's the real risk,'' Lim said.

Investors sold off bonds issued by Italy and Spain ? two major economies with debt problems which would be much tougher to rescue than Greece, one of the euro zone's smallest members.

Traders said that prompted the ECB to step in and buy the bonds of both countries as implied Italian borrowing costs hit a three month high around 6.26 percent.

On currency markets, the euro fell over one percent versus the dollar and yen.

Reuters and The Associated Press contributed to this report.

Source: http://www.msnbc.msn.com/id/45114513/ns/world_news-europe/

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