Protesters in the Greek city of Thessaloniki carrying banners written in German, ‘One people, one Reich, one Euro’, paraphrasing a Nazi slogan and ‘No to a new (German) occupation. A Greek ‘wanted’ poster bearing the photos of PM George Papandreou and finance minister Evangelos Venizelos says ‘Wanted by the Greeks’

Greek ministers this morning voted unanimously for a referendum on the bailout deal to take place in December, backing the proposal made by Prime minister George Papandreou as he fought to save his own skin.

Their vote came at the end of a seven-hour emergency cabinet meeting, during which Papandreou said: ‘The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro.

 

The move has horrified other European leaders, with France and Germany meeting Greek officials in Cannes for crisis talks today, ahead of a G20 summit on which the European economy now appears to hinge.

It heaped humiliation on French President Nicolas Sarkozy, who was today also due due to meet Chinese officials to discuss what role it could take in the crisis. Now Mr Sarkozy will meet the Chinese with a significantly weakened hand.

Economists warned that if Greece rejects the debt deal hammered out only last week, which would entail years of austerity, the entire future of the single currency is in peril.

They predicted that Italy, Spain and Portugal are likely to be plunged into a profound economic crisis because of their failure to get to grips with their towering debts.

The referendum would be an effective vote on whether or not Greece should remain in the straitjacket of the single currency and accept years of spending cuts and tax rises, or simply refuse to pay what it owes and crash out of the euro.

The Greek opposition is, if anything, more hostile to the bailout and austerity package than Mr Papandreou, and it would demand an even bigger write-down of the nation’s debts than the 50 per cent agreed with the EU and International Monetary Fund.

The sense of crisis in Athens – ruled by a military junta as recently as 1974 – was compounded by an unexpected announcement that Mr Papandreou intends to dismiss the chief of the defence staff and the heads of the army, navy and air force.

That raised speculation about the possibility of a military coup in Greece, an outcome said to have been deemed possible in a secret assessment by the CIA.

Greek-Cypriot Nobel economics laureate Professor Christopher Pissarides, of the London School of Economics, said: ‘Before 1974, when politicians were arguing and fighting, the military came in and said, “Come on now, let’s stop, there’s military rule until you sort it out”.

‘Since 1974, of course, democracy has worked, but it’s worrying when you have news about armed officers being replaced right in the middle of an economic crisis.’

The Foreign Office in London played down the prospect of a military takeover, saying officials in Athens were insisting that the Government had planned for some time to clear out its top brass.

 

But one British diplomatic source said: ‘Clearly with everyone talking about the country being in turmoil, the timing is odd.’

The most likely scenario is that the government will press ahead with a vote of confidence on Friday, which it looks likely to lose. An interim government will then be appointed before a snap election.

Last night a Greek government spokesman said Mr Papandreou had told the Cabinet he would hold a referendum seeking approval of the bailout deal come what may, and was determined to win Friday’s vote of confidence.

French President Nicolas Sarkozy said the proposal for a referendum had ‘surprised all of Europe’ and the hard-fought European bailout plan for Greece was the ‘only way possible’ to resolve that nation’s debt crisis.

 

 

Greece is effectively bankrupt and cannot pay off its debts, even with the tough austerity measures that have been forced upon it.

After fierce resistance, private banks and other investors agreed at a crunch summit in Brussels last week to write off 50 per cent of what its government owes.

The agreement was aimed at cutting Greek debt from 160 per cent of its earnings to 120 per cent by 2020. Without action, it would have ballooned to 180 per cent.

But the Greek people are furious at being asked to endure years of spending cuts and tax rises. There are increasing calls for the country to leave the euro, refuse to pay its way and reinstate the drachma.

In the Commons, Chancellor George Osborne said there was ‘no doubt’ that Greece’s decision to announce a referendum, slated to take place in January, had added to ‘instability and uncertainty’ in the eurozone.

He added: ‘Now ultimately it’s up to the Greek people and the Greek political system to decide how they make their decisions, but I would say it is extremely important for the eurozone to implement the package that they agreed last week, that is what I said was crucial at the time, that’s what they all said was crucial at the time and I think we need to get on with it sooner rather than later.’

Labour peer Lord Soley said: ‘When the history of this period is written it may well be that the Greek decision will be seen as the economic equivalent of the assassination of Archduke Ferdinand at Sarajevo in 1914. It will trigger events way beyond the borders of Greece or even Europe.’

Stock markets around the world crumbled yesterday as the eurozone lurched towards financial catastrophe. The FTSE 100 index fell more than two per cent in London – down 122.65 to 5421.57 – wiping £32billion off the value of Britain’s blue chip firms.

But there were far more punishing losses on the Continent, with shares in Italy and Greece down nearly seven per cent on a day of carnage on the financial markets. The Paris stock market lost 5.38 per cent, Frankfurt tumbled five per cent and the euro fell around 1.5 per cent against the U.S. dollar.

Shares in French banks were the worst hit on fears over their exposure to Greek debt. If Athens defaults, lenders in France look set to bear the greatest losses. One, Societe Generale, fell more than 16 per cent.

British banks did not escape the bloodbath, with Barclays losing 9.5 per cent of its value and state-controlled Royal Bank of Scotland down eight per cent.

Borrowing costs in Italy soared again yesterday as the crisis threatened to spread from Athens to Rome.

Lord Adair Turner, head of the UK’s Financial Services Authority, warned that Italy’s towering debts of 120 per cent of GDP present a much bigger threat to Britain’s banks than Greece.