Greek Gamble on Calling Referendum Stuns Euro Partners, Merkel Allies Say

Greece’s decision to call a referendum on its five-day-old bailout blindsided its European partners and placed another hurdle in the way of efforts to staunch the debt crisis.

The announcement came “out of the blue, it’s surprising, very risky,” Norbert Barthle, the ranking member of German Chancellor Angela Merkel’s Christian Democratic Union party on parliament’s budget committee, said in a telephone interview. “There’s an enormous amount at stake. Do we know how the Greek people will treat their government in this referendum? No. We have a new unknown.”

French President Nicolas Sarkozy will call Merkel at midday today to discuss the Greek referendum that sent stocks and the euro tumbling, the Elysee said. Sarkozy is “dismayed” by the Greek plan, Le Monde newspaper reported, citing unnamed people close to Sarkozy.

Greek Prime Minister George Papandreou’s personal and government popularity have plunged amid fresh austerity measures that sparked a wave of social unrest. He announced a parliamentary confidence vote yesterday that will conclude late on Nov. 4. The referendum will likely be held after the details of the European accord are tied up. The European Union wasn’t informed in advance of the plans, an EU official said today.

“The German government has no official information yet” on the referendum, the Finance Ministry said, calling it “a domestic political development” on which it wouldn’t comment.

‘High Intensity’

Completing the second bailout for Greece by the end of 2011 remains the EU’s goal and work on the package is under way “with high intensity,” the ministry said in a statement in Berlin. The chancellery declined to comment and referred to the Finance Ministry statement as the government’s position.

Pressured by the U.S. and China to avert the threat posed by the crisis to the global economy, euro-area leaders announced a package of measures on Oct. 27 including a second Greek bailout of 130 billion euros ($178 billion) and a commitment by bondholders to accept a 50 percent writedown in Greek debt. Also included were bank recapitalizations and a scaled up European rescue fund.

‘Whole Different Ballgame’

“If the Greek people don’t see the necessity of backing Papandreou we have a whole different ballgame,” Otto Fricke, the budget spokesman in parliament for Merkel’s Free Democratic Party coalition partner, said by phone. “If he doesn’t get a majority, then there’s no second aid package, no voluntary haircut. We’d have a potentially explosive situation, one that leaves us today baffled as to what we could possibly do next.”

Group of 20 leaders are due to discuss the debt crisis at a Nov. 3-4 summit in Cannes, France, that now risks being overshadowed by the Greek confidence vote result and, assuming the government survives, subsequent referendum.

The referendum call is a “bad decision” with ramifications far beyond Greece, said Alfredo Perez Rubalcaba, the Spanish Socialists’ candidate for the general election.

“Greece decides to postpone its correction and Europe, including Spain, will probably suffer as a result,” he said at a news conference in Madrid broadcast live.

In the event of a referendum result rejecting the package agreed to at the European summit, “Greece will have to deal with the consequences -- no new aid measures,” Michael Meister, parliamentary finance spokesman for Merkel’s Christian Democrats, said in an e-mailed statement. The enhanced rescue fund means “the euro area is prepared.”

“Greece is a democracy and we have to accept this,” he said.

To contact the reporter on this story: Brian Parkin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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