Ok, why is everyone stunned? Detailed in This Time its Different, Eight Centuries of Financial folly by Reinhart and Rogoff the Greeks were serially in default of their sovereign debt from the beginning of the 1800's to the mid 1900's. I also detailed in my book This Time Its Different NOT, 2 years ago that it was difficult to justify the Euro being stronger than the USD, as the Europeans were not more efficient and that we did not know if they had more or less debt that the States. Aivars Lode
LONDON -- Greek Prime Minister George Papandreou's decision to call a referendum on a freshly minted bailout package has shock waves across European governments and markets, sparking warnings that the move could push the country into a disorderly default and destabilize the entire euro zone.
The move also opened a rift within the ruling Socialist party, with one lawmaker resigning from the party in disagreement with the referendum and another one calling for early elections.
Mr. Papandreou announced late Monday a surprise referendum on Greece's bailout program, a move that could shore up support for his policies but risks undermining efforts to rescue the debt-laden country and stabilize the region.
Mr. Papandreou's decision was announced just days after European leaders in Brussels agreed on a set of measures to reduce Greece's debt burden and beef-up the firepower of the European Financial Stability Facility, a rescue fund, to make sure the continent can prop up other troubled nations in the currency area. If the Greek government survives a confidence vote expected Friday, the referendum on the aid deal is expected to take place in January.
Fears that the euro-zone plan could unravel if the bailout program is rejected at a Greek referendum rattled financial markets with stocks and the euro plunging, and 10-year Italian bond yields rising perilously close to their highest levels since the euro's inception.
Meanwhile, Greece's euro-zone partners were slow to respond, appearing unprepared and stunned by the developments.
French President Nicolas Sarkozy called an unscheduled meeting with key government ministers and the central bank governor for late Tuesday to discuss the potential fallout. Mr. Sarkozy has convened Prime Minister François Fillon, Bank of France Governor Christian Noyer, Finance Minister François Baroin, Budget Minister Valérie Pecresse and Foreign Minister Alain Juppé, a spokesman for Mr. Sarkozy said.
Mr. Sarkozy is set to discuss the situation by telephone with German Chancellor Angela Merkel, a spokesman said earlier.
Germany was groping for a credible a response as the government didn't appear to have been given much, if any, advance warning of Greece's plans. Rainer Brüderle, a senior member of the junior partner Free Democrats in Ms. Merkel's center-right coalition, called the Greek move "a little strange".
The finance ministry sought to play down the latest act in the Greek drama, calling it a local issue in the world of Greek politics, but Berlin seemed to have little insight into what was happening in Athens.
"The announcement of a possible referendum in Greece is a domestic development in Greece over which the German government until now has no official information and for that reason will not issue any comment," the German finance ministry said in a statement.
It said European leaders formulated clear expectations of Greece and other euro-zone members at last week's summit in Brussels.
"Based on this, the second aid package for Greece should be completed by the end of the year," the ministry said. "We are all working on this with great intensity."
European Commission president José Manuel Barroso and European Council president Herman Van Rompuy said they "took note" of the Greek prime minister's intention to hold a referendum. Messrs. Barroso and Van Rompuy said in a statement they had spoken to Mr. Papandreou on the telephone.
The decision by Mr. Papandreou fanned concerns among some investors that Greece could leave the euro zone.
Fitch Ratings Tuesday said a public referendum in Greece could push the highly-indebted country into a disorderly default or even an exit from the euro, putting the financial stability of the whole euro zone at risk.
A rejection of the EU and International Monetary Fund program "negotiated by the Greek government would increase the risk of a forced and disorderly sovereign default and—whilst not Fitch's central rating case—potentially a Greek exit from the euro," Fitch said.
Both scenarios would have severe financial implications for the financial stability and viability of the euro zone, it added.
Italian Prime Minister Silvio Berlusconi said he had "no doubt" that Greece's surprise decision was disturbing capital markets.
The Greek decision "was unexpected and triggers uncertainty after the recent European Council meeting and on the eve of the G-20 summit in Cannes," Mr. Berlusconi said in a statement. The Group of 20 industrial and developing nations meets in Cannes this Thursday and Friday.
Italy remained firmly in the market's firing line as concerns it could suffer a Greek-style debt meltdown have intensified in recent weeks.
Yields on Italian bonds rose sharply with the 10-year Italian bond yield increasing by 0.13 percentage points to 6.21%, while the yield on the five-year bond hit a euro-era high of 6.07%, 0.19 percentage points higher on the day despite continued buying of bonds by the European Central Bank.
Mr. Papandreou, in his announcement Monday, also called for a confidence vote on his government, which is expected on Friday. If the government survives the vote, the referendum on the aid deal is expected to take place in January.
But his survival appeared to be at stake Tuesday after Milena Apostolaki resigned as a member of his socialist Pasok party, leaving the government with just a two-seat majority in the 300-seat parliament.
Ms. Apostolaki, who became an independent deputy with her defection, said she strongly disagrees with Mr. Papandreou's decision to call a referendum on whether Greece should go along with austerity measures in return for European loans.
The move also prompted Vasso Papandreou, a leading Greek socialist lawmaker not related to the prime minister, to call for the creation of a unity government followed by early elections to safeguard the bailout deal.
"The party is in major turmoil," a senior socialist party official said. "I can't exclude more desertions today, which will lead to early elections."
—Matina Stevis in Brussels, Christopher Emsden in Rome and Neelabh Chatuverdi, Art Patnaude and Alexandra Fletcher in London contributed to this article. Write to William Boston at email@example.com and Costas Paris at firstname.lastname@example.org