The Greek prime minister’s decision to let the country’s people vote on a bailout package caused the world’s financial markets to go into freefall on Tuesday.
Wall Street followed the European bourses and slumped deep into the red on news that the deal to rescue Greece and prevent a wider sovereign debt crisis has been thrown into disarray.
As the region’s leaders – particularly Nicolas Sarkozy of France and Angela Merkel of Germany – scrambled to limit the damage, investors on both sides of the Atlantic dumped shares with bank stocks suffering the biggest sell-off.
The largest concern is not so much the fate of Greece but rather the possibly dire consequences for the entire currency union from this referendum which, in essence, will ask Greeks if they want to stay in the euro.
If they pull out it creates major problems according to Stefan Scharfetter, a Frankfurt based trader at Baader Bank: “What happens to a unitary currency when a member quits? Will there be a new currency? How will debts be charged with the new currency? These are questions that are hitting the capital markets. This creates considerable uncertainty and could cause major disruptions for the next few months,” says Scharfetter.
The main Athens stock market index was down close to seven percent in mid-afternoon, with more uncertainty and confusion as it emerged that Greek Prime Minister George Papandreou had not informed his own finance minister before announcing his decision to hold the referendum on the bailout.
A government source said Finance Minister Evangelos Venizelos, who has led the bailout talks with his European counterparts, was aware only that Papandreou was going call a vote of confidence in parliament.
Furthermore, Eurogroup president Jean-Claude Juncker has said Papandreou also neglected to tell other European leaders of the decision to go to a public vote.
On Tuesday morning, six members of Papandreou’s own PASOK party called on the prime minister to resign, further increasing the uncertainty in the markets. Another PASOK member of parliament defected, cutting Papandreou’s majority to 152 out of 300 MPs.
The referendum decision also raised tensions in the French seaside resort of Cannes, where G20 leaders will meet on Thursday, with Papandreou taking part in the discussions after being invited by France.
A large anti-capitalist demonstration and counter summit is expected to take place in Nice later today with a portion of Cannes’ famed Boulevard de la Croisette closed off. French police said they are taking the march very seriously as even a few troublemakers could dramatically disrupt the event.