Efforts to save euro unravel as Greece drops its bombshell
The Greek government was on the brink of collapse last night after a shock decision to hold a referendum on euro bailout plans sparked turmoil in stock markets across the world.
Uncertainty in Greece raised fresh fears that the single-currency crisis will spread. European stock markets plunged and the Italian government's borrowing costs hit record highs as investors warned that efforts to save the euro were "unravelling".
George Papandreou, the Greek prime minister, was facing calls by members of his own government to step down amid fears that Greeks will vote against the bailout package and the deep cuts in public spending its sponsors are demanding.
As Greek politics grew ever more chaotic, there were strong political protests as the government moved to replace military chiefs with officers seen as more supportive of Mr Papandreou.
A 'No' vote could mean Greece is forced to withdraw from the single currency, raising doubts about the euro's value and wiping trillions off the value of shares and loans across the continent.
At least two members of Mr Papandreou's Pasok party threatened to defect, which could cost him his parliamentary majority. The collapse of the Papandreou government could mean elections next month, raising fresh doubts about the bailout deal and delaying any final approval still further.
Opposition parties accused the government of trying to politicise the military leadership amid threats to Mr Papandreou's position. Greece was run by a military junta between 1967 and 1974. Local reports said the government had been panicked by residents posting portraits of top generals in parts of Athens.
European politicians ex-pressed incredulity and dismay at Mr Papandreou's announcement on Monday evening, which took even his own finance minister by surprise.
"Announcing something like this only days after the summit without consulting other eurozone members is irresponsible," Slovak finance minister Ivan Miklos said.
European Affairs Minister Lucinda Creighton said last week's European summit was meant to have dealt with the uncertainty in the eurozone.
"And this grenade is thrown in just a few short days later," Ms Creighton said. "Legitimately there is going to be a lot of annoyance about it."
The Greek crisis is likely to dominate tomorrow's G20 meetings of world leaders after markets panicked. The French stock market was down 5.4pc, the German market dropped by 5pc and Italian shares by almost 7pc. The Iseq was down 4.3pc.
"Risk aversion is back," said Eugen Weinberg, head of commodities research at Commerzbank. "The solution to the eurozone debt crisis that we thought we were celebrating last week no longer seems certain."
On stock markets, European banks took the worst of the trading.
The National Bank of Greece, Portugal's Banco Comercial and France's Societe Generale and Credit Agricole all saw shares drop by 12pc.
Germany's Commerzbank was down 8pc. In the US, the Standard & Poor's 500 Index lost 2.8pc and suffered the biggest two-day fall in a month.