Greek Prime Minister George Papandreou's grasp on power weakened further last night after his shock decision to call a referendum on the billion euro EU/IMF bailout pushed the eurozone into a fresh crisis and sent global stock markets tumbling.
His socialist party was on the brink of collapse after it lost a minister and six others called for the prime minister to resign.
One of the ministers, Milena Apostolaki said she will defect from his socialist party Pasok while local newspapers reported that Eva Kaili will also abandon Pasok.
"If it continues with Papandreou and the referendum, we will end up with a default and the default will push us into the drachma," former Greek Finance Minister Stefanos Manos said in an interview with RTE.
Emergency meetings between Greek politicians, France's Nicolas Sarkozy and German Chancellor Angela Merkel as well as IMF and EU officials have also been confirmed in a bid to tame a crisis that economists believe could destroy the euro and push the region back into recession over the coming months.
The euro dropped to its lowest level since early last month as ratings agency Fitch warned the referendum posed a threat to the stability of the region while it also talked of a "disorderly" default.
"The risk of a Lehman-style disorderly default now looms a bit larger than before, including some residual risk that Greece may leave the eurozone if it rejects the offer of orderly debt relief in exchange for harsh new spending cuts and reforms," said Holger Schmieding, chief economist at Joh Berenberg Gossler -amp; Co in London.
"This could be negative for markets for equities and other risk assets. It could exacerbate potential financial turbulence and the euro-zone recession."
Staging a referendum, reportedly to be held in January, threatens to throw the eurozone further into crisis as the majority of Greeks - 60% - 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.
There are also questions as to 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 50% 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.
A bad way to decide on bailout
By Ben Chu
Greece prime minister George Papandreou sprang a Halloween horror when he announced a referendum to decide if his country will accept the terms of the bailout deal agreed in Brussels last week.
So why would Greek voters decide to reject the deal? Here's some possible reasons:
- Public sector wages have been cut by 15%. An additional 20% cut is in the pipeline.
- Wages of employees of state-owned enterprises have been cut by 30%. A further 20% cut is due.
- Pensions in the public and private sector have been cut by 10%. An additional 4% cut is coming.
- 70% of public sector contract employees, around 85,000, have been made redundant.
- Total public sector employment has been cut by 10%.
- Spending on pensions, illness and drugs has been reduced by €3.4bn (£2.9bn), 1.5% of GDP.
Analyst Holger Schmieding estimates that this is "the harshest austerity programme in a Western economy in the last 60 years".
If this is supposed to be a bailout, there has to be a high chance the Greeks will reject it.
Of course, one can argue that the pain would be even worse without the EU/IMF assistance.
But plebiscites are dangerous and unpredictable things. Often people vote in them simply to punish incumbent governments, regardless of the consequences.
But would anyone argue a plebiscite is a good way to decide policy in the midst of a raging economic crisis?