Greek crisis: Papandreou promises referendum on EU deal

Prime Minister George Papandreou says he will respect the will of the Greek people

Greece will hold a referendum on a new European Union aid package intended to resolve the country's debt crisis, Prime Minister George Papandreou says.

Last week eurozone leaders agreed on a 100bn-euro loan (£86bn; $140bn) to Athens and a 50% debt write-off, in a effort to tackle the euro crisis.

But there have been large-scale protests in Greece against austerity measures demanded by the EU.

Analysts say a referendum could derail the wider deal on the euro debt crisis.

The Greek rescue package is a key part of the agreement reached last week after marathon talks between eurozone leaders.

They said banks holding Greek debt accepted a 50% loss, the eurozone bailout fund will be boosted to about 1tn euros and banks will have to raise more capital.

The Greek plan has rattled the financial markets.

The FTSE 100 in London opened 2.2% lower, the Dax in Frankfurt fell 3.5% and the Cac-40 in Paris dropped 3.4%.

This came in the wake of sharp falls on Monday, when the main European indexes closed lower by around 3%.

In Asia on Tuesday, the main indexes in Japan, Hong Kong and Australia all closed down by at least 1.4%.

'Final say'

Opinion polls in Greece show that most people do not support the austerity deal.

Mr Papandreou told a meeting of his governing Socialist party that Greek people would have the final say on the package, which is designed to reduce Greek debt by about 100bn euros.

"The command of the Greek people will bind us", he was quoted as saying by AFP news agency.

He set no date for the referendum, but indicated that it would be held after details of the deal have been finalised with the EU and the country's creditors.

It is a big gamble for Mr Papandreou, who will argue that it is in Greece's national interest to support the deal, the BBC's Europe editor Gavin Hewitt reports.

But our correspondent says that many people in Greece say they prefer the chaos of default to years of hardship.

The junior party in Germany's governing coalition has criticised the referendum plan.

The parliamentary leader for the Free Democrats, Rainer Bruederle, said a No vote would mean the Greek government was declaring bankruptcy.

"This sounds to me like someone is trying to wriggle out of what was agreed - a strange thing to do," he told the Deutschlandfunk radio network.

The referendum is another hurdle for the eurozone to get over, says the BBC's Matthew Price, in Brussels.

It comes at a bad time for the eurozone and those who hoped the crisis was being contained, he adds.

Last Friday, there were protests in several cities around Greece.

An important annual parade was cancelled in Thessaloniki after demonstrators blocked the route and shouted insults at President Karolos Papoulias.

Socialist dissenters

Many Greeks believe the government has gone too far in allowing the EU and the International Monetary Fund (IMF) to dictate the austerity measures needed to secure the bailout.

Mr Papandreou has also faced growing dissent from within his own Socialist party over the impact of the measures.

The party's approval ratings have plunged and its parliamentary majority has been cut by several defections to other groups.

Analysts say the promise of a referendum allows Mr Papandreou's government, which has born the brunt of public anger over the austerity measures, to pass responsibility for the country's future to the Greek public.

"The new agreement will be submitted to parliament for approval and then submitted to the judgment of the Greek people," Finance Minister Evangelos Venizelos told the Antenna TV channel.

"The Greek people can, of course, say no but must bear in mind the consequences of that decision."

Opposition parties said the government had only announced the referendum to avoid having to call an early general election.

"The prime minister is trying to buy time," said Costas Gioulekas from the right-of-centre New Democracy party.

"We want clear solutions. And a clear solution is obvious: elections."