ATHENS, Greece — Europe's days-old plan to solve its crippling debt crisis has been thrown into turmoil by the Greek Prime Minister's shock decision to call a referendum on the country's latest rescue package.
Stock markets plunged around the world Tuesday, particularly in Europe, with the Athens exchange losing 5.5 percent, on worries the Greek government could lose the referendum vote. If that were to happen, Europe could face a potentially devastating disorderly debt default and Greece's exit from the common currency.
"While it may be the democratic thing to do ... what happen if Greece votes 'no', which is possible given how unpopular the bailout plan appears to be amongst Greece's voters?" said Michael Hewson, analyst at CMC Markets. "The resulting fallout could well result in a complete meltdown of the European banking system and throw Europe into turmoil."
George Papandreou stunned investors, as well as his own citizens and partners in the eurozone, by announcing late Monday that a plebiscite will be held in what he called "a supreme act of democracy and of patriotism for the people to make their own decision." A confidence vote in the Socialist government will also take place at the end of this week.
Given that Greece is heading for its fourth year of recession next year, investors are worried Papandreou may lose the vote. A victory in the referendum, however, could shore up Europe's battle to contain its crippling debt crisis.
Papandreou is gambling that a success would solidify Greece's participation in the eurozone and keep a lid on the protests and strikes that have crippled the country, which is heading for its fourth year of recession in 2012.
A recent opinion poll suggested that 60 percent of Greeks were against the austerity measures that have been required by international creditors from the eurozone and the International Monetary Fund in return for crucial bailout loans. However, other polls show broad support for remaining in the eurozone.
Opposition parties rounded on Papandreou, accusing him of blackmail and vowing to block the vote at all costs.
The referendum would be the country's first since 1974, when Greeks voted to get rid of the monarchy, and is expected to be held early next year should the government get through the confidence vote.
The renewed uncertainty the referendum call has generated — and the prospect that the result of the vote is months away — has deflated any remnants of optimism over last week's grand European plan to contain the debt crisis.
After weeks of complex negotiations, eurozone leaders agreed last Thursday that private holders of Greek bonds should take a 50 percent loss on their holdings, reducing Greece's debt burden to 120 percent of national income by 2020 from around 180 percent at present. They also agreed to boost the bailout fund and recapitalize the banks.
Greece's European partners largely refrained from official comment on the referendum.
A senior politician in Germany's ruling center-right coalition said he was "bemused" by the announcement and made clear that a "no" vote would likely lead to a Greek bankruptcy.
"If Greece ... doesn't fulfill the conditions, then we have the situation of a state bankruptcy," said Rainer Bruederle, parliamentary leader of the junior party in German Chancellor Angela Merkel's coalition government.
"Then the other countries have to protect themselves, and Greece has to see by what means it gets out of its misery — whether they can stay in the euro, whether they leave, what they do; that is the consequence of Greece's democratic decision," Bruederle, of the Free Democratic Party, said on Deutschlandfunk radio.
Swedish Foreign Minister Carl Bildt tweeted: "I truly fail to understand what Greece intends to have a referendum about. Are there any real options?"
That incredulity was seemingly shared by investors. News that Greece's Finance Minister Evangelos Venizelos went to a clinic after suffering stomach pains added to the renewed bout of fears in the markets.
Greek shares led a broad retreat in Europe. Germany's DAX slid 4.3 percent while France's CAC-40 dropped 3.7 percent. The euro fell to a daily low of 1.37 while borrowing rates jumped higher for Italy and Spain, considered the next weakest links in the crisis.
Even before Papandreou's pledge, the shine from last week's three-pronged plan to contain the crisis was wearing off. As well as increasing the private sector involvement in the Greek bailout, eurozone leaders agreed to boost the firepower of the bailout fund to €1 trillion ($1.37 trillion) and a recapitalization of the banking sector.
Jacques Cailloux, an analyst at Royal Bank of Scotland, noted that Papandreou's referendum pledge is likely to derail any hopes that the international community will contribute to the plan to boost Europe's bailout fund, the European Financial Stability Facility, at the upcoming summit of the Group of 20 leaders in Cannes, France.
"The added uncertainty surrounding a potential referendum in Greece will likely block any new potential financial support from countries outside the monetary union given the potential implications for the future of the Union," Cailloux said. "We thus view this as a major negative for Greece and the rest of the momentary union."
Greece's main opposition conservatives called for Papandreou's resignation.
"In his attempt to save himself, Mr Papandreou set a divisive, blackmailing dilemma that endangers our future and our position in Europe," New Democracy party leader Antonis Samaras said after a meeting Tuesday with President Karolos Papoulias. "I explained to the president that New Democracy is determined at all costs — at all costs — to prevent such rash experiments, and it can do that. "
He did not elaborate on what he planned to do.
Respected conservative Kathimerini daily called Papandreou's announcement "a high-risk initiative" that further dents the country's international image and will accelerate the country's return to its old national currency, the drachma.
"The last thing Greece needs right now is additional uncertainty," the paper said. "It is certain that the country will be paralyzed and will be caught in an endless debate lasting weeks, during which obviously neither the state nor the government nor any other institution will function."
Pylas contributed from London. Geir Moulson in Berlin also contributed to this report.