Greek referendum ignites German anger, hammers markets

Prime Minister George Papandreou's shock decision to call a referendum on Greece's bailout drew veiled threats from Germany on Tuesday and hammered markets edgy over the euro zone crisis.

European politicians complained that Athens was trying to wriggle out of the rescue deal agreed only last week, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union.

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

Others were stunned by Papandreou's apparent bolt from the blue on Monday on the plan for a 130 billion-euro bailout and a 50-percent write-down on Greece's huge debt, which 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 remains unknown. EU officials said they had yet to be officially notified of the vote.

The reaction from Germany, which funds a large part of European Union rescues for Greece as it struggles with a huge debt, was of scarcely disguised fury.

A leader in German Chancellor Angela Merkel's centre-right coalition said he was "irritated" by Papandreou's announcement and said the euro zone would have to consider turning off the flow of money which has kept Greece afloat over the past year.

"This sounds to me like someone is trying to wriggle out of what was agreed -- a strange thing to do," said Rainer Bruederle, parliamentary floor leader for the Free Democrats and a former German economy minister.

"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."

Investors scurry
Financial markets, which had drawn encouragement from the euro zone deal on a new bailout for Greece, took Papandreou's bombshell badly. Players scurried for safer investments, hammering stocks and punishing the euro.

"The risk is that a 'no' from the Greeks will completely derail the rescue efforts," a Paris-based share trader said. "We can kiss the year-end rally goodbye."

European stocks were down close to 3 percent and MSCI's all-country world stock index shed 1.7 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.

On foreign exchange markets, the euro fell more than one percent versus the dollar and yen as investors cut exposure to the common currency.

"The Greek referendum is a real curve ball. Nobody saw it coming and it injects a lot of uncertainty," said Steven Saywell, head of FX strategy at BNP Paribas.

Germans on the streets of Berlin expressed exasperation with the entire euro project.

"All I understand is that the Greeks keep causing us problems. We'd be better off without the euro," said Bert Kuehn as he delivered rolls to a bakery.

Some politicians urged caution as so much remains uncertain in the fluid world of Greek politics.

"If Greece votes 'no' that will mean a political crisis," said Spanish Secretary of State for the European Union Diego Lopez Garrido.

"For the moment we must be prudent and wait to see what Papandreou says before the full parliamentary session to explain the exact reach of his proposal," he told Cadena Ser Radio.

Papandreou, whose ruling Socialist party has suffered several defections as it pushes waves of austerity measures through parliament while protesters rally outside, said he needed wider political backing for the fiscal measures and structural reforms demanded by international lenders.

Analysts said the latest opinion poll showed a majority of Greeks took a negative view of the bailout deal.

The renewed uncertainty is likely to be an embarrassment for G20 leaders meeting in France this week trying to coax China into throwing the euro zone a financial lifeline.

"If there was to be a referendum, we may reasonably conclude that they may not accept the austerity measures. We may conclude that it will bring the pack of cards tumbling down," said Howard Wheeldon, senior strategist at BGC Partners in London.

Nobel prize-winning economist Christopher Pissarides caught the mood of uncertainty: "It is difficult to predict what will happen to Greece if they reject it. It will be bad enough for the European Union and the euro zone in particular, but it will be far worse for Greece.

"In the scenario of a 'No' vote Greece would declare bankruptcy immediately, they would default immediately. I can't see them staying within the euro," he said.

Referendum on membership
"The situation is so tight that basically it would be a vote over their euro membership," Finland's Europe Minister Alexander Stubb told broadcaster MTV3.

Greek Finance Minister Evangelos Venizelos also warned citizens that euro zone membership was at stake.

"It's crunch time," he told lawmakers on Monday.

"Citizens will have to answer the question: are we for Europe, the euro zone and the euro?"

Early on Tuesday, Venizelos checked into an Athens hospital with stomach pains but was expected to be discharged later.

Analysts were divided over whether Greek voters would accept the deal but agreed that a damaging month or two of market volatility lay ahead while European leaders looked on nervously.

Opposition New Democracy leader Antonis Samaras will visit President Karolos Papoulias on Tuesday to discuss developments and push for snap elections, party officials said.

"Mr. Papandreou is dangerous, he tosses Greece's EU membership like a coin in the air," party spokesman Yannis Michelakis said. "He cannot govern and instead of withdrawing honorably, he dynamites everything."

Up to the voters
Papandreou told the Greek voters it was up to them to decide the country's fate.

"We trust citizens, we believe in their judgment, we believe in their decision," he told Socialist party deputies. "In a few weeks the (EU) agreement will be a new loan contract... we must spell out if we are accepting it or if we are rejecting it."

Papandreou said the referendum would take place in a few weeks and Venizelos told Greek TV it would probably be held early next year.

Opposition parties accused Papandreou of looking for a way out for his embattled party by dragging Greece, which has seen violent clashes between anti-austerity protesters and riot police, through a lengthy period of political instability.

"I never expected Papandreou to take such a dangerous and frivolous decision," said Dora Bakoyanni, former foreign minister and leader of the small centre-right Democratic Alliance party. "All the international media will say that Greece itself is putting the EU deal at risk."

Papandreou also said he would ask for a vote of confidence to secure support for his policy for the rest of his four-year term, which expires in 2013.

Analysts said he was likely to win that, despite dissent among his parliamentary team, and parliament officials said the confidence debate would begin on Wednesday, with a vote on Thursday or Friday.

Money running out?
Greece is due to receive an 8 billion-euro tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a "no" vote.

A survey carried out on Saturday showed that nearly 60 percent of Greeks viewed the agreement on the bailout package as negative or probably negative.

But David Lea of Control Risks struck a more positive note. "It's all in the question. If he can frame it as a sufficiently apple-pie issue, he stands some chance of winning," he said.

(Reporting by Dina Kyriakidou and Harry Papachristou; Additional reporting by Ingrid Melander, Fiona Ortiz in Madrid, Jermey Gaunt in Lond and Erik Kirschbaum in Berlin; Writing by Dina Kyriakidou and David Stamp)