Greece government struggles after referendum call

Greek Prime Minister George Papandreou triggered turmoil across the eurozone, stock market mayhem and a domestic political crisis on Tuesday with a shock move to put a hard-won debt deal to a referendum. With leaders of the world's 20 biggest economies getting ready for a summit from Thursday focused on the economic crisis, Papandreou's shock announcement fuelled fears that the rescue efforts could begin to rapidly unravel. The premier also announced a vote of confidence but his narrow parliamentary majority was then cut by the defection of a deputy while a senior member of the ruling Socialist party said Greece needed a unity government and early polls. Analysts said the confidence and referendum votes amounted to a ballot on the future of the eurozone which is also under pressure from debt strains in Italy. All of Europe's main markets registered sharp falls at the new risk of Greek default and contagion, with the German blue-chip DAX 30 stocks index slumping by more than six percent at one stage while French shares were down over five percent. Italian stocks plunged 6.12 percent, led by big falls for banks. The falls were echoed in New York where the blue-chip Dow Jones Industrial Average tumbled 2.22 percent in the first 10 minutes of trade. Athens witnessed a meltdown as stocks plunged 7.06 percent amid warnings that a rejection of a deal that is deeply unpopular in Greece would force it to leave the 17-nation bloc which uses the euro single currency. "This is a referendum, in which they're effectively voting on Greece's euro membership," Alexander Stubb, the Europe minister for Greece's fellow single currency member Finland, told the commercial MTV3 network. In a sign of the deep unease in European capitals, French President Nicolas Sarkozy and German Chancellor Angela Merkel were to hold talks by phone. In a joint statement, EU president Herman Van Rompuy and European Commission president Jose Manuel Barroso said they had full trust in Greece to "honour the commitments undertaken" to reduce spending in return for bailout funds. Italian Prime Minister Silvio Berlusconi, another leader under pressure as a result of the eurozone crisis, registered his sense of shock and annoyance. "There is no doubt the Greek decision to hold a referendum on the European Union's rescue plan is having a negative effect on the markets," he said. "This is an unexpected decision that generates uncertainties after the recent European Council and on the eve of the important G20 meeting in Cannes." There was also exasperation among lenders who have agreeed to write off 50 percent of Greek debt holdings under the deal. "The uncertainty that will probably last for weeks as a result is anything but helpful in terms of stabilising an already difficult situation," said Michael Kemmer, head of Germany's BdB banking association. "Important details following the euro summit will now be delayed or, in the worst case scenario, put on ice. In addition, it is totally unclear what would happen if the Greek people reject the rescue package," he added. Papandreou, who now has 152 deputies in the 300-seat Greek parliament, has faced increasing dissent within his own party over the tougher austerity policy monitored by the EU and the International Monetary Fund that has sparked general strikes and widespread protests, many of them violent. As well as agreeing to a referendum, which is likely to take place early next year, the prime minister will submit himself to a confidence vote in parliament to be held on Friday -- the second day of the G20 summit in Cannes. "The command of the Greek people will bind us," Papandreou told parliament late Monday. "Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted." Although the deal agreed last Thursday after marathon talks in Brussels included an agreement to write off 100 billion euros ($137 billion) of debt owed by Greece, the Athens government still has to implement a painful package of austerity measures to get its hands on bailout funds. In a survey in the To Vima news weekly on Sunday, 58 percent of Greeks termed the deal 'negative' or 'probably negative', although over 72 percent of those polled said Greece should remain in the euro. In an online commentary, the Moneycorp currency broker said Papandreou had presented Greeks with "the ultimate Hobson's Choice"." "They could either have their financial eyes ripped out by austerity measures or by the chaos that would follow the total bankruptcy of Greece and the wipe-out of its financial institutions," it said. In a report released on Monday, the Organisation for Economic Cooperation and Development (OECD) said that rapid action by EU leaders to enact the rescue measures that they had agreed was key to the prospects of global recovery.