Greek Prime Minister George Papandreou’s decision to let his people vote on the country’s bailout package caused the world’s financial markets to go into freefall on Tuesday.
The deal to rescue Greece and prevent a wider sovereign debt crisis is now in disarray just days after European leaders had agreed the outlines of a second bailout for Athens at marathon summit talks in Brussels.
Around Europe and on Wall Street there was a massive sell-off in the region’s stock markets with banks suffering worst, and French banks, which are among the most exposed to Greek government debt getting hammered.
“We have just added fuel to the fire and we don’t understand at all the decision of the Greek PM,” said Marc Touati, chief economist at Assya Compagnie Financiere in Paris.
“If there is a referendum the ‘no’ will win. Greece is playing a suicidal game that could lead to its exit of the euro zone so there is fear on French banks, but also on (euro zone) states.”
Investors have lost confidence in the Greek government, even more so when it was learned the prime minister had not informed his own finance minister before announcing his decision to hold the referendum. European leaders were also taken by surprise.
French President Nicolas Sarkozy and German Chancellor Angela Merkel scrambled to limit the damage.
They will hold an emergency meeting with the Greek prime minister in Cannes before the G20 Summit to push for a quick implementation of Athens’ bailout deal, Sarkozy’s office said in statement, but whether that is possible remains to be seen.
Andrew Lim, banking analyst at Espirito Santo in London, said that a Greek “no” vote could trigger a “hard default”, forcing banks to take losses of about 75 percent on their Greek sovereign bonds and raising the threat of a systemic risk.
“If we get a hard default in Greece, it will exacerbate the situation with Italy and Spain. It just increases the problem of Italy going down the same route, and that’s the real risk,” Lim said.