Greek Cabinet Backs Call for Referendum on Debt Crisis

Athens – With the government teetering on the verge of collapse, the Greek cabinet offered its full support early Wednesday to Prime Minister George A. Papandreou for his surprise plan to call a referendum on the Greek financial crisis.

The proposal threatens Greece’s adherence to the terms of a new deal with its foreign lenders and has plunged Europe into a fresh bout of financial turmoil.

But several lawmakers in the governing Socialist Party rejected the plan, raising the possibility that Mr. Papandreou will not survive a no-confidence vote scheduled for Friday that depends on his holding together a razor-thin parliamentary majority.

An emergency cabinet meeting convened by Mr. Papandreou ended at 3 a.m. with the cabinet saying that it unanimously supported the prime minister’s call for a referendum, local news outlets reported. The opposition and some members of his own party, however, were calling for new elections immediately.

Despite the political turmoil provoked by Mr. Papandreou’s call for a referendum, the prime minister appeared to have rallied his troops behind him after the seven-hour cabinet meeting.

The Greek government spokesman, Elias Mossialos, said the government aimed to hold the referendum “as soon as possible” — “on the condition” that Greece had the “basic elements, not the full agreement” of the loan deal with the European Union in place. News reports on Wednesday said the referendum might be brought forward as soon as December.

The political atmosphere remained tense and chaotic, with politicians both in the government and in the opposition maneuvering intensely ahead of the confidence vote.

The leader of the center-right opposition, Antonis Samaras, repeated calls on Wednesday for early elections but did not ask his legislators to resign, as he had hinted he might do, a move that would have immediately led to early elections. The next general election is not due until 2013.

Still, the political instability in Athens seemed likely to delay — and perhaps scuttle — the debt deal that European leaders reached after marathon negotiations in Brussels last week.

Financial markets in Europe rallied on Wednesday after two days of losses that had wiped out the gains since the Brussels deal was announced last week. Some analysts said that Greece was now coming closer to a messy default on its debt, and perhaps a departure from the zone of 17 countries that use the euro as their common currency.

Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, apparently caught off guard by Mr. Papandreou’s call for a referendum and then by the disarray in his party, said they would hold emergency talks on Greece with euro zone leaders on Wednesday. They said they also planned to meet with representatives of the Greek government before a critical meeting of the Group of 20 advanced and emerging economies on Thursday, and they defended the terms of the bailout package as “more necessary than ever today.”

The chairman of the euro zone finance ministers, Jean-Claude Juncker, warned that the plan to hold a referendum endangered an $11 billion loan that Greece is to receive under the bailout deal, and that Greece urgently needed to avoid a default. Mr. Juncker, who is the prime minister of Luxembourg, said Greece could face bankruptcy if it votes no on the bailout.

The big fear is that a decisive turn against the bailout package in Greece could undermine European efforts to enforce deep budget cuts in other heavily indebted European countries, especially Italy, which is mired in its own political crisis and has a far larger economy and much more debt than Greece.

Political analysts and several advisers to Mr. Papandreou said the prime minister had decided to announce a popular referendum on Monday night as his last best hope to shore up his eroded political standing. They said he wanted to put Greece’s fate back in the hands of the Greek people and to force his many opponents — both inside his government and in the opposition — to coalesce around the idea that what is at stake is Greece’s membership in the euro zone.

Mr. Papandreou wanted Greek voters “to take a position, to see the choice before us in its starkness, hoping they will back the lesser of two evils, instead of letting irate reactions in the streets dominate the debate,” said one adviser to the prime minister.

But on Tuesday, it appeared that his move may have backfired. One lawmaker in his governing coalition left the Socialist Party to become an independent, another said she would not vote confidence in the government unless the prime minister formed a coalition government, and an additional six leading Socialists wrote a letter calling on Mr. Papandreou to resign and to schedule early elections for a new government with greater political legitimacy. Together, the developments made it doubtful whether his government would survive a confidence vote, because the loss of even two supporters threatened his parliamentary majority.

Meanwhile, the center-right opposition New Democracy Party on Tuesday stepped up its calls for early elections. Its leader, Mr. Samaras, has opposed most of the austerity measures the government accepted in exchange for foreign financial aid. Mr. Samaras has said that if he were in power, he would try to renegotiate the terms of Greece’s arrangement with its main foreign lenders, known as the troika: the European Union, the European Central Bank and the International Monetary Fund.

“Mr. Papandreou, in his effort to save himself, has presented a divisive and extortionate dilemma,” Mr. Samaras said on Tuesday. “New Democracy is determined to avert, at all costs, such reckless adventurism.”

While the political instability took Europe and markets by surprise, it was less of a shock in Greece. Mr. Papandreou’s political capital had run out and tension has been building for months — not only with the center-right opposition, which objected to many of the terms of the austerity plan, but also within his own party.

That party, known as Pasok, is deeply divided. A more reform-minded wing is upset that Mr. Papandreou has not acted decisively enough to carry out the structural changes needed to revive the economy, while a more traditional wing is opposed to some of the changes that inevitably cut into the heart of the social welfare state the party was elected to promote.

On Tuesday, the two sides appeared to gravitate toward one idea: that the referendum proposed by Mr. Papandreou was a mistake.

“His party just couldn’t hold any more,” said Ilias Nicolacopoulos, a professor of political science at the University of Athens and a pollster with close ties to the Socialist Party.

“He did exactly the opposite of what a large number of his M.P.’s were asking for,” he said. “They were asking for a coalition government or cabinet reshuffle or some sort of cooperation that would bring broader consensus, not a referendum that would put the country in danger of blowing everything up.”

Eva Kaili, a Socialist member of Parliament, said she would not support the government in a confidence vote and called for a government of national unity. She said it was too late for a referendum, because it might destroy the arrangement already reached with Greece’s foreign lenders.

“It took us a long time to manage to reach an agreement,” Ms. Kaili said in a telephone interview. “The time is over. This should have happened one year ago, to ask people if they want the I.M.F. to help us or not.”

If Mr. Papandreou’s government falls, it would not be the first one in Europe to be toppled by the austerity demanded by European debt relief. In Ireland and Portugal, governments fell after accepting bailouts from the European Union and the I.M.F., and last month the Slovakian government fell over a vote on whether to participate in the European Union’s rescue package.

But Greece’s problems are more acute, and its economic slump is much deeper, making the prospect of a government collapse even more worrying. While a new government might try to reopen negotiations with lenders and seek new terms, European leaders have repeatedly dismissed that idea, saying that trying to do so would be damaging and would throw away months of work on a plan to keep Greece from defaulting.

Many Greek voters say they are tired of hearing about decisions made in foreign capitals and political initiatives that do not represent ordinary Greeks. “The government is no longer in control — others are calling the shots,” said Akis Tsirogiannis, a 42-year-old father who recently lost his job at a furniture workshop in Athens.

He said he would vote against the debt deal in a referendum. “This deal, like all the others, is a life sentence of austerity for Greeks,” he said. “We need to reclaim our country.”

Dimitris Bounias contributed reporting from Athens, and Stephen Castle from Brussels.