Greece's government will hold a referendum on whether to accept the financial rescue on offer from its partners in the euro, a surprising and high-stakes gambit by Prime Minister George Papandreou that threatens to undermine efforts to contain Europe's debt crisis.
In the latest demonstration of investors' jittery nerves, North American stock markets fell once the news crossed the Atlantic, putting pressure on the Group of 20 leaders to find a way to restore confidence in the global economy when they meet this week in Cannes, France.
In a move that could neutralize an aggressive political opposition, Mr. Papandreou made the surprise announcement late Monday in a speech to lawmakers from his party, the PanHellenic Socialist Movement. The party governs with a mere three-vote majority in the Greek parliament.
In opting for a referendum, Mr. Papandreou is entrusting an angry electorate with a delicate pan-European compromise that was agreed to last week only after two tense gatherings of the continent's leaders in Brussels.
The reward could be an end to the cliffhanger votes that have added dangerous uncertainty to previous bailouts. The risk is that bond traders doubt Mr. Papandreou's ability to win the referendum and demand even higher interest rates to lend European countries money. Heavily indebted countries such as Italy and Spain already are borrowing at record-high rates, and further increases only risk forcing some of Europe's biggest economies to default.
"An unprecedented conflict is in the making," said Sony Kapoor, managing director of Re-Define, an economic advisory firm based in London. "The [Greek]decision is good for democracy, but is likely to make the euro crisis worse by heightening uncertainty in this very fragile environment."
Mr. Papandreou didn't say when the vote would be held, nor did he say precisely what Greeks would be asked. Greece last held a referendum in 1974, when citizens voted in a landslide to abolish the monarchy months after the collapse of a military dictatorship.
The Greek move adds to the pressure on the Group of 20 leaders. The meeting this week in Cannes is shaping up to be the most important since the G20 summit in London in the spring of 2009, when the world's leading nations fashioned a program to push some $1-trillion (U.S.) into the global economy.
"There are many financial challenges, but when you think about it, the solutions are based on human solutions," Monique Leroux, chief executive officer of Montreal-based Desjardins, the world's sixth-biggest co-operative, said in an interview. "We need better co-operation between countries and political leaders."
Greece already is on financial life support from a previous international bailout that is now seen as too small to keep the government solvent. The country's debts are almost twice the size of its annual economic output and investors have lost all faith in the government's ability to honour new bonds, making it impossible to raise new funds to finance its operations.
Yet a full-blown default could well be the Greek population's preferred option.
Along with painful cuts to government spending that will result in the loss of thousands of jobs, the European rescue plan would establish in Athens a permanent team of auditors from the European Commission, the European Central Bank and the International Monetary Fund to oversee Greek budget policy, which represents a demeaning loss of sovereignty.
The government's attempts at austerity this year have been met with mass strikes, sit-ins and sometimes violent demonstrations. A poll on the weekend showed that 60 per cent of the population views the European debt agreement negatively.
Global stock markets surged after Europe's leaders pledged to reduce Greece's debt to a manageable 120 per cent of gross domestic product from the current 180 per cent, give the euro-zone financial stability fund access to €1-trillion and force banks to add more than €100-billion to their reserves.
But most of the details have yet to be worked out, a shortcoming that investors find more troubling by the day. For example, the plan to expand the resources of the rescue fund includes asking pension funds and other deep-pocketed private investors and flush countries such as China to contribute to a special investment vehicle that may or may not be run by the IMF. Few of those investors are stepping up.
The main U.S. stock exchange, the Standard & Poor's 500 Index, saw its biggest drop in almost a month on Monday, with most of the decline coming in the hour after Mr. Papandreou's referendum announcement. In Toronto, the S&P/TSX Composite Index tumbled 267 points, or 2.14 per cent, to 12,252.06.