World stock markets plummeted Tuesday on Greece’s call for a referendum on the European debt-relief agreement, while the continent’s leaders scrambled about how to react to the surprise development.
Asian indexes fell sharply, and European stocks plunged. Markets in Paris and Frankfurt slid five percent, with U.S. indexes falling more than two percent in afternoon trading. Stocks of banks holding Greek debt were especially hard hit.
European Union leaders Herman Van Rompuy and Jose Manuel Barroso said they “fully trust” Greece to uphold last week’s eurozone debt-relief agreement. It forgives $140 billion in Greek debt, in exchange for the Athens government carrying out widespread austerity measures that have angered many Greeks, as well as boosting the continent’s bailout fund for future emergencies.
But other European leaders and financial analysts said they were shocked when Greek Prime Minister George Papandreou late Monday called for the referendum, which could be held early next year. Several said a Greek vote against the debt-relief agreement would amount to Greece deciding to leave the bloc of 17 nations that use the euro currency and lead to new turmoil on world financial markets.
World Bank president Robert Zoellick said it “could be a positive signal” if Greece votes for the debt agreement, but warned that if it is rejected, “it’s going to be a mess.”
Ireland’s European affairs minister Lucinda Creighton said the referendum was a grenade thrown into the continent’s financial turmoil just days after many thought European leaders had acted decisively to calm fears about a Greek default on its obligations. She said that “legitimately there is going to be a lot of annoyance” about the referendum plan.
French President Nicolas Sarkozy and German Chancellor Angela Merkel said they would meet Wednesday in Cannes, France with leaders from the International Monetary Fund (IMF) and Greece to discuss the latest snag in solving the continent’s debt crisis. The Group of 20 leaders of the world’s biggest and emerging economies are headed to Cannes for a summit on Thursday and Friday. Economic issues are at the center of the summit’s agenda, including the European debt crisis, and fears that it could spawn a new worldwide recession.
Papandreou has been a staunch supporter of the plan to cut Greece’s debt, while binding his country to years of austerity measures. But Papandreou told ruling Socialist party members in Parliament that the “command of the Greek people will bind us.” He said if the Greek people do not want it, the plan will not be adopted.
European and world leaders have praised the adoption of the plan aimed at cutting Greek debt and calming world financial markets worried about a Greek default.
The Institute of International Finance said that even with the planned referendum, the large banks it represents would keep their pledges to absorb 50 percent losses on the Greek debt they hold. The debt-relief agreement also forces European banks to increase their cash reserves.
But the Greek people for months have recoiled at the tax increases and spending cuts the Athens government has been forced to adopt to satisfy its international creditors. They have staged repeated strikes in protest, some of them violent.
One Greek survey showed 60 percent of those questioned took a negative view of the Brussels agreement, reached in the middle of the night last Thursday.
The Greek leader’s call for a referendum came as new reports in Europe show that the economic fortunes of the 17 eurozone nations are markedly weakening, with higher unemployment and diminished growth prospects for 2012. Until Monday, there had been no suggestion of a referendum on the plan.
The Paris-based Organization for Economic Cooperation and Development (OECD) predicted that collectively the economies of the bloc of countries that use the euro will virtually stall in 2012, with some of them sliding into a recession. The agency projected growth of only three-tenths of one percent, less than a sixth of the 2 percent growth that was projected just five months ago.