Markets Slide After Surprise Referendum
European markets plunge on proposed Greek bailout vote; announcement shocks world stocks
CANNES, France — European stock markets fell sharply on Tuesday amid concern that a possible referendum in Greece could lead the country to reject an international rescue plan and perhaps drop its use of the euro.
U.S. markets also opened markedly lower, with the Dow falling 2 percent, the S&P 500 falling 2.4 percent and the Nasdaq dropping 2.4 percent in early morning trading.
Greek Prime Minister George Papandreou said Monday that before Greece proceeds under the bailout plan being developed for by the International Monetary Fund and European leaders, he would put the matter to a national referendum. Papandreou also said he will call a fresh confidence vote for his government in the national parliament.
Details of the new rescue plan are supposed to be negotiated in coming weeks with the IMF and European officials. After weathering intense criticism in Greece for the inability of a current bailout plan to revive the economy, Papandreou said it was up to the people of Greece — frustrated by severe budget-cutting, tax increases, and public sector job losses — to decide if they want to continue.
It is “time for the citizens to reply responsibly,” Papandreou said. “Do they want us to implement it or reject it? If the people do not want it, then it shall not be implemented. If yes, we shall proceed.”
If Greece refuses to go along with the demands of its international lenders, that would mean a halting of international loans to the country and a likely default on its bond payments — a potential blow to Europe’s broader economy and the world’s as well.
The possibility triggered a sell-off of more than five percent in major French, German and euro-region indexes, wiping out the gains that followed last week’s approval by European officials of the crisis management plan.
The brief sense of relief that followed their action has been steadily eroding: Investors have driven up interest rates on Italian bonds since then, analysts have cast doubt on basic aspects of the crisis plan and the possibility of a rejection by Greek voters may prove to be the coup de grace.
The announcement was unexpected by other European leaders, who spent an intense several days of negotiation last week to develop what they hoped would be a convincing response to Europe’s financial crisis. The plan included a 50 percent reduction in debts Greece owes to banks and pension funds around the world, and other fresh efforts to stabilize the Greek economy. Nevertheless, Greek banks and the national pension system still face investment losses in the tens of billions.
The Greek move appeared to take German officials by surprise. Late Monday, the German finance ministry called it a “domestic political development” on which the German government “as yet had no official information.”
A top leader of Chancellor Angela Merkel’s junior coalition partner said he was “irritated” by the announcement of a referendum. If the Greeks vote against the measures, former economy minister Rainer Bruederle told German radio, then “we’ll have a national bankruptcy” in Greece.
