Death knell for a Greek debt deal

Paris and Berlin trembled overnight after Greek Prime Minister George Papandreou unveiled surprise plans to hold a rare national referendum on Greece's latest bailout package.

According to French newspaper Le Monde French President Nicolas Sarkozy was dismayed by the announcement, believing that the agreement that he and German Chancellor Angela Merkel had hammered out last week – which boosted the firepower of the eurozone's bailout fund and forced banks to write off 50 per cent of their Greek debts – had been enough to ensure that the eurozone debt crisis would not spread to Italy. Suddenly, everything is up in the air again.

"The Greek action is irrational and dangerous from their point of view”, one of Sarkozy's close aids said. French sources said the Germans are also said to be "stunned” by Papandreou's move.

At this stage, Paris and Berlin believe that Papandreou's hand was forced by a rebellion within his PASOK Socialist Party. But the announcement is likely to spell the demise of last week's agreement in Brussels, which Papandreou had appeared to endorse an agreement. It's impossible to imagine that bankers will agree to write off 50 per cent of their loans now that they're faced with possibility that Greece could decide to default at the referendum, likely to be held next February. It's also impossible to believe that the German parliament, the Bundestag, will vote in favour of extending further aid to the country under these conditions. As a result, Greece could struggle to avoid default in the months leading up to the referendum.

As part of last week's deal, Greece was to have received €100 billion in fresh aid, to help with its financing needs over the next few years, while the country's bankers agreed to write off about €100 billion in Greek debt. In exchange, Athens was forced to push ahead with tough austerity measures and to allow its main creditors – the European Union, the International Monetary Fund and the European Central Bank – to dictate its fiscal policy.

But the deal sparked a huge outcry in Greece, with critics claiming that Greece had been forced to relinquish its sovereignty and was now a colony of Brussels. On Friday, hundreds of protesters shouting "traitors, traitors” blocked the National Day Parade in the country's second largest city, Thessaloniki, forcing Greek President Karolos Papoulias to leave the parade.

One opinion poll published on Sunday found that 58.9 per cent of Greeks judged the new European deal as negative for Greece, while only 12.6 per cent considered it would have a positive impact on Greece's recession-ravaged economy. Under the terms of the new bailout, Greece will see another 100,000 job losses over the next three years and big reductions in pensions.

In the meantime, Papandreou has signalled that he will seek a parliamentary vote of confidence in his administration, possibly as early as this Friday. But even the outcome of the vote is uncertain. Strong opposition to the country's austerity program has seen the Socialist Party's majority whittled down to 153 members in the 300-member parliament.