Greek Government on brink of collapse as stocks tank
Published 01/11/2011 | 07:35
GREEK Prime Minister George Papandreou’s grasp on power weakened further today after his shock decision to call a referendum on the euro billions EU/IMF bailout pushed the eurozone into a fresh crisis.
His socialist party was on the brink of collapse after it lost a minister and six others called for the prime minister to resign.
Milena Apostolaki said she will defect from his socialist party Pasok while local newspapers reported that Eva Kaili will also abandon Pasok.
“If it continues with Papandreou and the referendum, we will end up with a default and the default will push us into the drachma,” former Greek Finance Minister Stefanos Manos said in an interview with RTE.
Emergency meetings between Greek politicians, France’s Nicolas Sarkozy and German Chancellor Angela Merkel as well as IMF and EU officials have also been confirmed in a bid to tame a crisis that economists believe could destroy the euro and push the region back into recession over the coming months.
The euro dropped to its lowest level since early last month as ratings agency Fitch warned the referendum posed a threat to the stability of the region while it also talked of a “disorderly” default.
“The risk of a Lehman-style disorderly default now looms a bit larger than before, including some residual risk that Greece may leave the euro zone if it rejects the offer of orderly debt relief in exchange for harsh new spending cuts and reforms,” wrote Holger Schmieding, chief economist at Joh Berenberg Gossler & Co in London, in a note.
“This could be negative for markets for equities and other risk assets.
“It could exacerbate potential financial turbulence and the euro-zone recession.”
The US markets also fell this afternoon on the news taking their lead Europe and Asia earlier as the bailout plan looked set to unravel.
Both the Down Jones and NASDAQ were over 2pc off as investors abandoned the markets after the Greek move shocked the markets.
The FTSE 100 Index was 2.8pc lower after the Greek Premier’s unexpected move cast fresh doubts on last week's much-heralded proposals to protect Europe from collapsing into recession.
The ISEQ index of Irish shares was 2.7pc off while both France’s CAC and Germany’s DAX dropped more than 4pc with French and German banks falling sharply.
French banks are amongst those most exposed to Greek debt.
Michael Hewson, analyst at CMC Markets, said if Greece voted against the eurozone deal, the fallout could result in "a complete meltdown of the European banking system and throw Europe into turmoil".
Elsewhere, weak manufacturing figures from China raised fears that the Asian powerhouse economy was coming off the boil.
Europe could plunge further into recession in the coming months economists have warned.
Staging a referendum, reportedly to be held in January, threatens to throw the eurozone further into crisis as the majority of Greeks (60pc) object to the bail-out, according to a survey published last week.
If Greece were to reject the plan, which requires deep spending cuts, it would risk a full-scale default and possible ejection from the euro.
The country could even run out of money to pay civil servants or state pensions if the troika decided to pull the plug.
There are also questions as to whether European governments, including those of Greece and Italy, will be able to drive through the tough austerity measures demanded by the agreements.
The deal that European leaders and the IMF struck last week would see banks take a 50pc writedown on Greek loans, cutting the country’s debt by up to €100bn, alongside a €130bn international rescue effort on top of the existing €110bn package. No dates have been set for the referendum, which would include a confidence vote in the government.
“Heightened Greek uncertainty could propagate to other fragile euro countries, in particular Italy,” said Thomas Costerg, an economist at Standard Chartered Bank.