Greek govt on shaky ground amid shock referendum fallout
Greek Prime Minister George Papandreou saw his parliamentary majority cut to two seats today as the fallout continued from his shock decision to call a referendum on the country’s latest rescue package.
One MP defected, and at least seven more Socialists called for the formation of a cross-party, national unity government, leaving Mr Papandreou with control of 151 seats in a 300-seat house.
The Presidents of the European Commission and European Council today said they "trust that Greece will honour the commitments it's undertaken" in relation to the EU aid package agreed last week.
In a joint statement this afternoon, Jose Manual Barroso and Herman Van Rompuy said they "take note of the intention of the Greek authorities to hold a referendum" on the matter, adding that they are convinced the agreement on the table is the best option.
The statement follows a phone call between the pair and the Greek premier.
Meanwhile markets continued to tumble over fears that Europe’s plan to save the euro was already unravelling.
Should the Greek government lose the referendum vote – and opinion polls say it is going to have real trouble getting enough support – then the implications for Greece and Europe are massive. The vote could end up deciding whether Greece remains in the 17-nation euro currency union.
Markets, it seemed, were taking the view that Mr Papandreou will not be able to pull off a come-from-behind victory – assuming that his government holds together.
“Talk about your all-time bonehead moves,” said Benjamin Reitzes, an analyst at BMO Capital Markets. “It would reintroduce the risk that Greece could face a disorderly default and potentially be forced to leave the euro.”
Mr Papandreou stunned investors, as well as his own citizens and his partners in the eurozone, by announcing late last night that the vote will be held in what he called “a supreme act of democracy and of patriotism for the people to make their own decision.” A confidence vote in the government will also take place at the end of this week.
The announcement came as the shine from last week’s European deal appeared to be wearing off.
On Monday, sentiment was already turning sour after US brokerage firm MF Global filed for bankruptcy amid reports that it had bought too much bad European debt and fears over the public finances of Italy, the eurozone’s third-largest economy. Italy’s debts dwarf the money that Europe’s bailout fund will have at its disposal if last week’s commitments are delivered.
The plan presented last week by eurozone leaders was intended to be Europe’s comprehensive solution to a debt crisis that has already seen three countries, including Greece, bailed out.
The three-pronged strategy of boosting the bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing the banks to raise more capital was largely viewed favourably by the markets, although details need to be ironed out.
As well as the events in Europe, investors have a raft of economic news to digest this week, culminating in Friday’s monthly US jobs report.
Earlier in Asia, stocks fell also sharply.
