Greek poll reignites meltdown fear

Mr Papandreou will meet German Chancellor Angela Merkel and French President Nicolas Sarkozy, as well as other EU leaders and the International Monetary Fund on the fringes of the G20 summit in Cannes to discuss his decision to allow the Greek public to have their say on the country’s latest rescue package.

Should the Greek government lose the referendum vote, a outcome which looks increasingly likely according to opinion polls, then the implications for Greece and Europe are massive and would leave the future of the eurozone gravely uncertain.

Experts predicted the vote could end up deciding whether Greece remains in the 17-nation euro currency union and fears are once again mounting that it will default on its debts, leaving economies across the world exposed to massive losses.

Mr Papandreou was forced to call the referendum in the face of widespread political and public opposition to the rescue package in Greece. One MP from the governing Pasok party has resigned, cutting Mr Papandreou’s parliament majority to two, and six other leading party members have called on him to step down. The Greek government also faces a crucial confidence vote on Friday.

Last week, eurozone leaders agreed on a loan, worth £86bn, as well as to write off 50 per cent of its debt. In return, Greece must make deep cuts in its spending, including dramatic cuts to pensions and wages, as well as making thousands of civil servants redundant.

The news of the referendum caused panic on global stock markets, particularly in the United States and Europe, where things where beginning to return to normal after the announcement of the bailout plan last week. Shares in Barclays were down nine per cent while taxpayer-backed banks Lloyds and Royal Bank of Scotland were down six per cent and eight per cent, respectively.

The gloom intensified when a closely-watched survey showed the UK’s manufacturing sector slipped into decline in October, triggering fresh fears that the economy could slide back into recession.

David Jones, chief market strategist at IG Index, said: “The decision by Greece to hold a referendum on the bailout is a shock to investors who thought that we were finally nearing the end.

“It raises the prospect of the crisis dragging on further still.”

There were even bigger losses on European markets, where the Cac-40 in Paris and the Dax in Frankfurt were down five per cent, while the Italian leading shares index was down nearly seven per cent.

Chancellor George Osborne said the global recovery depended on the agreement going through. “Greece has to make its own decisions about how it takes its own decisions. But I am very clear that we have got to stick with the agreement that was reached by the eurozone nations – and indeed members of the European Union like Britain – last week.

“That is a very important part of recovery, not just in the eurozone, but for the whole world including the United Kingdom, and if we don’t get the eurozone sorted that is going to cause real problems for Britain.”

Meanwhile, international broker MF Global emerged as the first major casualty of the eurozone’s debt woes after it filed for bankruptcy protection in the US.

The news from Greece curtailed some short-lived economic optimism at home after the Office for National Statistics revealed that GDP grew 0.5 per cent between July and September, a rate ahead of City forecasts of around 0.3 per cent, but this did little to cheer traders.