Greek government faced possible collapse over referendum call on bailout

The Greek government faced possible collapse on Tuesday as ruling party lawmakers demanded Prime Minister George Papandreou resign for throwing the nation’s euro membership into jeopardy with a shock call for a referendum.

Caught unawares by his high-risk gamble, the leaders of France and Germany summoned Papandreou to crisis talks in Cannes on Wednesday to push for a quick implementation of Greece’s new bailout deal ahead of a summit of the G20 major world economies.

Greek Prime Minister George Papandreou is throwing in the towel and is looking for a graceful exit. By calling a vote, he wants the people to say that they don’t want the euro rather than (saying it) himself,” said Axel Merk, president of Merk Investments and an expert on European fiscal policy.

It’s widely assumed that any further austerity measures required as terms of another Greek bailout would be rejected in a popular vote, regardless of how that “no” vote impacted Greece’s economic future and its relations with the rest of Europe.

“The people will say ‘no,’” Merk predicted. “What Papandreou’s asking is, ‘Do you guys want to suffer and make the tough choices?’ Of course the answer will be ‘no.’ Then the country will fall into anarchy and (Papandreou) will say it’s not my fault, it’s what the people wanted.”

Papandreou has thrown that agreement into doubt and almost single-handedly revived the issue of contagion.

If Greece is cut off, default is all but inevitable, and the likelihood of Greece leaving the EU altogether increases, as well.

Merk believes default was inevitable “from the get go,” and that if there’s a silver lining to Papandreou’s startling announcement is that it will force Europe to contain Greece once and for all, and begin addressing emerging debt issues in Italy and elsewhere.

“There was no solution on Greece last week,” he said. “The bank recapitalization program is the one thing that’s for real. That’s one thing that’s being taken seriously and being pursued.”

The euro and global stocks were pummeled on financial markets after the Greek move threw into question the survival of crucial efforts to contain the euro zone’s sovereign debt crisis.

Six senior members of Greece’s ruling PASOK socialists, angered by his decision to call a plebiscite on the 130 billion euro rescue package agreed only last week, said Papandreou should make way for “a politically legitimate” administration.

European politicians expressed incredulity and dismay at Papandreou’s announcement on Monday evening that took everyone by surprise, including his own finance minister.

“Announcing something like this only days after the summit without consulting other euro zone members is irresponsible,” Slovak Finance Minister Ivan Miklos told Reuters.

Ireland’s European affairs minister, Lucinda Creighton, whose own country is struggling through an EU/IMF bailout programme, said last week’s European summit was meant to have dealt with the uncertainty in the euro zone.

“And this grenade is thrown in just a few short days later,” Creighton said. “Legitimately there is going to be a lot of annoyance about it.”

In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkel conferred by telephone, Sarkozy’s office said: “France and Germany are determined to ensure, with their European partners, the full implementation in the quickest time frame, the decisions adopted at the summit, which are today more important than ever.”

The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline.

It could also further undermine dwindling political support in northern Europe for aiding Greece. Dutch Prime Minister Mark Rutte told parliament in a letter his cabinet was concerned about the risk of delay and uncertainty.

Business executives in Greece expressed despair at how the country was being run and markets speculated on whether Italy will be the next euro zone country to slide into a debt crisis.

I think by late evening this saga will have come to an end because he (Papandreou) will have lost the slim majority that he has in parliament,” Athens Chamber of Commerce head Konstantinos Michalos told Reuters Insider television.

“This referendum will not happen. I’m hoping and praying for a government that will join other political forces.”

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could face bankruptcy if voters rejected the bailout package.

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