Frankfurt: It took only a few words from Greece's prime minister to upend Europe's efforts to convince the world that its grand plan to save the euro would mark a turning point in the continent's debt crisis and keep it from hurting the global economy.
The chaos generated by George Papandreou's mere proposal to put Greece's participation in the deal to a referendum exposed the fragility of the European plan and the lack of confidence it enjoys in markets.
A top European official warned that Athens could be left to go bankrupt if it went through with the vote and experts said the broader eurozone deal - which hopes to protect larger countries like Italy - could collapse.
Ultimately, Greece could leave the euro union, causing massive financial havoc and pushing the global economy back into recession.
That prospect could be enough to keep the referendum from happening - Papandreou's government could collapse before the proposal goes through, having lost huge amounts of support from its own party.
After a grueling seven-hour Cabinet meeting, Papandreou's ministers expressed "total support" for his referendum proposal and said the vote would be held "as soon as possible," government spokesman Ilias Mossialos said early on Wednesday.
But Papandreou's government still faces a vote of confidence scheduled for Friday. The prime minister was summoned to attend emergency talks on Wednesday on implementation of the bailout convened by French President Nicolas Sarkozy and German Chancellor Angela Merkel in Cannes, France, a day ahead of the Group of 20 Summit in the French Riviera.
The referendum proposal piled more pressure on an already creaking deal that was facing scrutiny from markets that found details wanting.
European leaders agreed on last Thursday on euro 100 billion ($ 136 billion) in new bailout loans for Greece to accompany a 50 per cent debt writeoff on the debt owed to its private creditors. The broader plan will also push European banks to strengthen their finances against losses on Greek bonds and strengthen the bailout fund to backstop other governments.
Yet key details were lacking: Would enough banks join the "voluntary" writedown? How would a scheme to magnify the bailout fund's financial power work? Would banks refuse to raise new capital and instead buttress their finances by simply lending less money, hurting the economy? Would the 50 per cent reduction still leave Greece with too much debt to repay?
Now the referendum proposal adds even more uncertainty. Yields on Italian bonds have jumped above 6 per cent despite an effort by the European Central Bank to drive them down by buying them in the secondary market.
The referendum proposal also calls into question Greece's commitment to the bailout plan. Parliament was due to vote on it, but hanging its fate on a popular vote in Greece, where protests have intensified over the past year, is perhaps too bold a political move.
Papandreou is hoping to get a solid mandate to implement austerity measures over coming years, but the uncertainty created by the proposal itself - and the fact that the vote would be months away - risks sinking the European deal before Greeks can even vote on it.
Jean-Claude Juncker, the chair of eurozone ministerial meetings, suggested Greece may not get its next bailout loans - which had already been approved and were due to be paid out in coming weeks - if it goes ahead with the vote.
Athens runs out of money to pay pensions and salaries by mid-November and has to pay bondholders money in December. Failure to do so could trigger a messy default with dire consequences for stock and bond markets.
Markets would plunge. European banks would suffer losses, making credit harder to get for businesses and hurting the economy. Borrowing costs would rise for other European governments, companies and households, worsening their finances, on fears they will default, too.
Banks and financial firms in other countries would suffer as well. American broker MF Global Holdings filed for bankruptcy protection after markets lost confidence in its heavy bet on European government debt.
President Barack Obama and other leaders of the Group of 20 forum of rich and developing countries have urged Europe to wrap up a solution to the debt crisis by a summit in Cannes on Thursday and Friday so that the crisis does not disrupt global growth.
If Greece defaults, its banks will likely collapse because they hold large amounts of government bonds. They would probably need to be taken over by the government. Unable to borrow, Greece would have to immediately balance its budget by making even more drastic cuts.
At that point it might face a decision to leave the euro, which would let it devalue a reinstated drachma by some 50 per cent and improve export competitiveness.
"The community's patience with Greece seems to be running short," Commerzbank economist Christoph Weil wrote in a note. "Against this backdrop there is a real risk of the IMF and eurozone countries terminating their support payments."
Facing collapsed banks, "it is likely that the country would opt for an exit from the European Monetary Union as it would in this way regain its ability to act on monetary and fiscal policy at least in the short term."
Months of uncertainty over the vote, to be held early next year, would threaten the stability of larger economies like Italy, which saw its borrowing rates rise sharply on Tuesday and would be too expensive to rescue.
Fears that the plan could come undone drove a broad retreat in global markets. Germany's DAX and France's CAC-40 both slid 5.2 per cent but Italy's main index fared even worse, slumping by 6.7 per cent.
The euro fell 1.5 per cent to $ 1.3648 while borrowing rates jumped higher for Italy and Spain, considered the next weakest links in the crisis.
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