Greek Vote Threatens Bailout

Premier Calls for Surprise Referendum Days After European Leaders OK Aid Deal

The Wall Street Journal

ATHENS—Greek Prime Minister George Papandreou stunned Europe by announcing a referendum on his country's latest bailout—a high-stakes gamble that could undermine the international effort to preserve the euro.

A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.

A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown. The government expects to hold the referendum in January.

Some Greek government officials believe a defeat in the referendum could propel their country out of the euro zone. Many European policy makers fear that a messy Greek default could spark a financial-market panic that would particularly affect Italy, a major European economy that's already struggling to retain investors' trust.

Mr. Papandreou's dramatic announcement, which he delivered late Monday in a speech to lawmakers, renders the outcome of Europe's debt crisis more uncertain than ever. It comes less than a week after euro-zone leaders agreed on a "comprehensive package" of measures to keep Greece afloat, reassure financial markets and stabilize the region. That agreement was supposed to ensure that Athens avoids a unilateral debt default, restructures its debts in cooperation with bondholders, and cuts its budget deficit further in return for a €130 billion ($180 billion) bailout.

With the fate of the deal in the lap of Greek voters, the euro crisis is likely to dominate this week's summit of the Group of 20 leading global economies in Cannes, France. For months, the U.S. government has been pressing Europe to resolve the two-year-old Greek debt crisis, which is undermining investor confidence in ever-growing swaths of the euro currency zone. The lingering uncertainty, in turn, has hurt confidence in global financial markets, and the looming referendum will only accentuate that.

The announcement in Athens roiled financial markets late Monday, pushing the euro down 2.1% against the dollar to $1.3859, the European currency's biggest one-day slide in six months. Already-weak U.S. stocks sank further into the red. The Dow Jones Industrial Average suffered its worst daily decline in a month, falling 276.10 points, or 2.3%, to 11955.01. "Maybe the [Greek bailout] deal is in jeopardy," said Stephen Leuer, a floor trader at X-FA trading. "Any sort of doubt is definitely going to set us back," he said, adding that U.S. markets are "very sensitive" to news from Europe at present.

Markets slipped Tuesday morning in Asia, with Japan off 0.8%, Australia down 1.4% and South Korea down 0.1% in early trading.

Greece's embattled leader decided to go for a referendum as a way of shoring up support for the drastic government spending cuts and tax hikes that his country's parlous finances have forced him to enact, Greek officials say.

Mr. Papandreou, who inherited a fiscal mess after winning election in 2009 as head of a Socialist administration, has had to slash Greeks' cherished welfare entitlements to please the country's international creditors, in the face of opposition from labor unions and parts of his own party.

The mild-mannered, U.S.-born premier floated the idea of a referendum earlier this year as public hostility to austerity mounted, but he backed off amid fears that such a move would be destabilizing for Greece and for Europe.

In recent weeks, however, public and parliamentary patience with austerity and an ever-deepening recession has stretched thin, weakening Mr. Papandreou's authority.

The government needs a stronger democratic mandate to implement last week's bailout agreement with Europe and the IMF, Mr. Papandreou told a stunned audience of Socialist lawmakers on Monday. For that, he said, "we need to go to a referendum."

The question put to voters will be simple, he said: "Do we want to adopt the new agreement? Or do we want to reject it?" The popular verdict would be binding, he added. "If the Greek people do not want it to be implemented, very simply it won't be implemented."

What would happen next is anything but clear. A binding voter rejection of Europe's terms for a bailout would leave euro-zone leaders such as German Chancellor Angela Merkel and French President Nicolas Sarkozy with a bitter choice. Either they let Greece default on its €355 billion of public debt, risking panic throughout Europe's government-bond markets and banking sectors; or they cave in and offer Greece more generous bailout terms.

Relaxing Greece's bailout terms would anger voters in Germany and other countries who are already resentful of having to subsidize Greece, a country that is widely viewed in Europe as having lived beyond its means for years. It could also prompt other recipients of rescue loans—Ireland and Portugal—to demand similarly generous treatment. That, in turn, would test both the political tolerance and the financial wherewithal of Europe's core economies to support weaker euro nations.

A Greek referendum on its bailout, for the first time in the two-year crisis, would put what many Greeks view as draconian spending cuts demanded by Athens' international creditors to a democratic test. The result of the vote could reverberate around the euro zone, putting pressure on governments in other European countries that are enacting austerity measures to stem the debt crisis to ask for their voters' consent.

Opinion polls suggest Mr. Papandreou faces a struggle to convince an increasingly angry electorate. A survey published at the weekend showed that 58.9% of Greeks oppose last week's European deal; there are fears that the planned debt restructuring will bring further pain while yielding few benefits for the country.

The poll, the first since last week's bailout deal was struck, showed that some 54.2% of Greeks thought a national referendum should be called to approve the new aid deal, while only 40% thought Parliament should decide.

However, Mr. Papandreou is betting that voters may approve the bailout package if they are forced to confront the alternative of national bankruptcy and a possible exit from the euro.

Some Greek officials say the referendum question could be worded in such a way that voters see it as a matter of Greece's continued euro membership. The recent opinion poll showed 72.5% of Greeks want to stay in the euro zone. "The actual meaning of the referendum is a choice between the euro and the drachma," the traditional Greek currency, a senior Socialist official said.

In a bid to shore up flagging support within his own party, Mr. Papandreou also called for a fresh vote of confidence in his government—just months after narrowly winning such a vote in June.

Write to Alkman Granitsas at alkman.granitsas@dowjones.com, Marcus Walker at marcus.walker@wsj.com and Costas Paris at costas.paris@dowjones.com