Markets Slump Amid 'Suicide' Greek Referendum

Financial markets have suffered heavy falls after the Greek prime minister announced he would hold a referendum on the EU bailout package.

Stock and bond markets opened up down following George Papandreou's decision - and on closing, it did not look much better.

The FTSE 100 Index closed more than 2% lower. European stocks were also hit with Italy down 7% and Germany's DAX and France's CAC both sliding at least 5%.

In Greece, the markets shed more than 6%, while US stocks were also affected with the Dow Jones closing down 2.5%.

Speaking on Jeff Randall Live, Constantine Michalos, the head of the Athens Chamber of Commerce, said Mr Papandreou's idea was a 'suicidal move' that had sent the markets "completely in the doldrums".

"He came out of the blue with this referendum idea, which he hadn't communicated even to his closest cabinet ministers ... or with the major leaders of the European Union," he said.

"And we've all seen the results of this flippancy - of this suicidal political move. We've seen the financial markets completely in the doldrums.

"The euro has been threatened. And of course the credibility factor concerning Greece - which has been a problematic issue for months now as a result of the debt crisis - has worsened even more."

His comments came after European Union leaders said they "fully trust" that Greece will meet its eurozone bailout commitments.

The presidents of the European Commission and the European Council issued a joint statement saying they fully expect Greece will live up to the conditions agreed at the summit where the latest 130bn euro aid package was set.

An unscheduled meeting will take place on Wednesday, ahead of the G20 summit in Cannes, to discuss the announcement by the Greek prime minister George Papandreou that he would put the bailout to a referendum .

French president Nicolas Sarkozy and German Chancellor Angela Merkel agreed on talks with the Greek leadership, the International Monetary Fund and EU heads "to examine the conditions under which the commitments made can be honoured".

Mr Papandreou said on Monday if the Greek people did not want the deal - designed to slash the country's mountain of debt by nearly a third - it will not be adopted.

He gave no date or other details on the proposed referendum, which would be the first in Greece since 1974.

"This will be the referendum: the citizen will be called upon to say a big 'yes' or a big 'no' to the new loan arrangement," he told Socialist members of parliament.

"This is a supreme act of democracy and of patriotism for the people to make their own decision... we have a duty to promote the role and the responsibility of the citizen."

Greek opposition leader Antonis Samaras dismissed the calls for a referendum and suggested snap elections instead.

Nobel prize-winning economist Professor Christopher Pissarides said the deal was the only solution to solve the debt crisis.

"If it's rejected, it'll be a disaster for Greece," he told Sky's Jeff Randall Live. "It'll be bad enough for the European Union, and the eurozone in particular, but it'll be far worse for Greece."

He said a 'no' vote would lead to Greece being declared bankrupt and being removed from the eurozone. Mr Papandreou would have to resign.

European leaders finally agreed the elements of the debt deal early on Thursday morning following marathon talks in Brussels.

It was decided that banks would have to accept the 50% writedown - higher than the 40% they had originally offered.

It was also agreed that the 440bn euro (£386bn) bailout fund will be increased to around 1trn euro (£876bn).

A day after the details of the bailout were revealed a survey showed that nearly 60% of Greeks viewed it as "negative" or "probably negative".

On Thursday, leaders of the world's 20 biggest economies gather in the south of France for the G20 summit.