Greece plunges euro into crisis, France insists on debt deal

Greece plunged the eurozone back into crisis and markets into panic on Tuesday with a shock call for a referendum on a debt rescue package reached just days ago with huge difficulties.

Prime Minister George Papandreou's decision to hold a confidence vote on Friday and then a referendum on the debt deal stunned investors, angered EU leaders and left the eurozone back at square one, with Italy now under pressure just ahead of a high-profile Group of 20 summit in France.

The turmoil saw some European markets slump by 5.0 per cent or more and pushed borrowing rates uncomfortably near record levels for Italy, which can ill afford to pay extra to raise funding given its strained finances.

French President Nicolas Sarkozy called Greece to order, insisting, in concert with Germany, that last week's accord was the only way to solve its debt problems.

Noting that the referendum call "surprised all of Europe," Sarkozy said "France reminds everyone that the accord adopted ... unanimously by the 17 member states ... is the sole possible way to resolve Greece's debt problems.

"Giving people a voice is always legitimate but the solidarity of all the eurozone countries is not possible unless each one agrees to measures deemed necessary," Sarkozy said.

France and Germany, he added, took the initiative to hold a meeting Thursday before the opening of the G20 summit in Cannes, of all European institutions, the International Monetary Fund and the Greek prime minister to discuss "the conditions under which the engagements undertaken will be kept."

The White House meanwhile said the uncertainty caused by Greek's move showed the need for rapid implementation of the eurozone deal.

The announcement "just reinforces the notion that ... the Europeans ... need to elaborate further and implement rapidly the decisions they made last week," US President Barack Obama's spokesman Jay Carney said.

"It remains the case that the Europeans have the capacity to deal with this crisis and they need to implement the very important decisions they made last week to provide a conclusive resolution to it," Carney added.

The latest turn in the eurozone debt saga put Italy right back in the firing line, raising fears that it could follow Greece, Ireland and Portugal in needing a bailout and that the contagion could spread even further, to Spain.

Italian stocks closed down 6.80 per cent with bank shares in free fall, in the worst session since the start of the global financial crisis in 2008.

Borrowing rates also shot up to well above 6.0 per cent, coming close to levels that most believe cannot be sustained for the long term.

In an effort to get ahead of the debt curve, Italian Prime Minister Silvio Berlusconi promised to take "rapid" action on economic reforms, long sought by his European partners, ahead of the G20 summit.

He told German Chancellor Angela Merkel that "the Italian government is determined to introduce the measures rapidly," his press office said.

Berlusconi had sought to ease market concern and pressure from Italy's eurozone partners last week with promises to increase the pension age, launch a privatisation programme and reform labour laws to make firing easier.

In a brief phone call to Merkel, Papandreou told the chancellor that the referendum would "strengthen the country in the eurozone and globally" but other leaders voiced frustration and annoyance that they had not been informed of his plan at last week's negotiations.

Analysts said that the referendum call effectively left last week's accord dead in the water, with Greece facing default and even an exit from the eurozone.

If the vote is 'No,' it would scupper a deal to cut Greece's debt of more than 350 billion euros ($495 billion) by about 100 billion euros while recapitalising the banks who will take a 50-per cent loss on their holdings of Greek government debt.

In a joint statement, EU president Herman Van Rompuy and European Commission president Jose Manuel Barroso said they had full trust in Greece to "honour the commitments undertaken."

Greece however was teetering on the edge of chaos, with military chiefs replaced ahead of a confidence vote on Friday that could bring down Papandreou's government.