THE GREEK government was on the verge of collapse last night as Prime Minister George Papandreou rejected calls for him to cancel the proposed referendum on the Eurozone rescue package.
Early this morning, the cabinet agreed to back the referendum.
In another shock announcement, the top brass in Greek’s armed forces were sacked en masse last night.
The CIA warned in May that austerity measures risked provoking a military coup. A military junta ruled Greece between 1967 and 1974.
Two socialist MPs defected, cutting the government’s majority to one. A further six leading socialists called for Papandreou’s replacement. Finance minister Evangelos Venizelos was hospitalised after stomach pains, missing crisis talks.
“No one will be able to doubt Greece’s course within the euro” after the referendum, Papandreou insisted last night. A confidence vote is set for Friday, and the opposition from within Papandreou’s own party may cause the government to fall, prompting an election.
Analysts believe the government’s fall would result in the IMF negotiating the ongoing bailout with governing PASOK and the opposition New Democracy party. The same process was undertaken in Portugal, allowing the state to avoid bankruptcy, whoever won the following election.
French President Nicolas Sarkozy summed up the mood on the referendum: “This announcement surprised all of Europe,” he said.
European Council leader Herman Van Rompuy and Commission boss Jose Manuel Barroso said: “We are convinced that this [rescue] agreement is the best for Greece. We fully trust that Greece will honour the commitments undertaken in relation to the euro area and the international community.”
An emergency meeting was called in Cannes today ahead of tomorrow’s G20 conference. Papandreou will meet EU leaders and the IMF.
Markets had risen on the EU’s package last week, but crashed on news of the referendum. The DAX tumbled five per cent to 5834.51.
And early this morning Japan’s Nikkei share average took a bath, falling two per cent on opening.
The yield on 10-year German bunds dropped 26 basis points (bps) to 1.77 per cent, as investors sought safe havens, while UK gilt yields fell 23bps to 2.21 per cent.
Meanwhile the yield on ten-year Italian government debt rose 10bps to 6.19 per cent and Greek yields soared to 24.647 per cent.
“By threatening a referendum, which could result in a disorderly default and exit from the euro, Papandreou is trying to extract better terms from Germany,” Schneider FX’s Stephen Gallo told City A.M.