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The beleaguered Greek government shocked its nation - and Europe - for a second consecutive night by sacking all its defence chiefs for no clear reason.
After yesterday's stunning news that it would put the hard-fought euro bail-out deal to a referendum that its population is very likely to reject, financial markets around the world tumbled.
But there was yet another shock for European leaders scrabbling about for signs that George Papandreou's government is in something like control of the spiralling situation.
Following a surprise meeting of the cabinet, Greece's defence minister, Panos Beglitis, sacked the chief of the Greek National Defence General Staff and the heads of the Greek Army, Navy and Air Force.
Beglitis said last month that he wanted to select his own people for the posts because the powerful Greek military was a 'state within the state', according to The Guardian.
However, no official reason has yet been given.
The news comes hard on the heels of another day of worrying market plunges, with Angela Merkel and Nicolas Sarkozy calling a crisis meeting following the shock announcement of the Greek referendum on the bail-out deal.
In a frantic phone call, the leaders of the eurozone's two largest economies agreed that the Greek decision has made it more necessary than ever to push forward with plans thrashed out during last week's EU summit.
They will meet with the Greek government, the IMF and their European partners tomorrow in Cannes, ahead of a G20 summit, to advance their view and urge fellow leaders not to wobble.
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Chancellor Merkel’s spokesman Steffen Seibert said that she and the French president 'agreed, together with their European partners, to guarantee the full and swift implementation of the summit decisions.'
He added: 'Germany and France are convinced that this agreement will enable Greece to return to sustainable growth.'
Agreement: Germany's Chancellor Merkel and French President Nicolas Sarkozy have called a crisis meeting to push ahead with bailout plans after Greece announced it will hold a referendum on the deal
A statement issued by President Sarkozy's office read: 'France and Germany are determined to ensure, with their European partners, the full implementation in the quickest time frame, the decisions adopted at the summit, which are today more important than ever.
'France and Germany are convinced that this accord will enable Greece to restore lasting growth.
'In consultation with our European partners and the IMF, (we) would like a road map to be quickly agreed to ensure the implementation of this deal.'
Today the German Dax index fell by 6.2 per cent and the French CAC-40 by 5.9 per cent after last night's announcement by Greek prime minister George Papandreou that the hard-bargained agreement - which took months for Europe's leaders to hammer out - will be put to a public ballot.
Greece's Prime Minister George Papandreou took European leaders and many in his own parliament by surprise with his announcement of a referendum
Share prices for French banks and other lenders exposed to Greece and other weak eurozone countries also slumped.
Societe Generale tumbled 13 percent and BNP Paribas and Credit Agricole fell more than 10 per cent. They are among the most exposed to Greece through sovereign debt holdings and loans.
Markets in Asia have also fallen with Japan's Nikkei closing with a 1.7 per cent drop, Hong Kong's Hang Seng losing 2.5 per cent and Australia's S&P/ASX shedding 1.5 per cent.
Sarkozy met with his prime minister, finance minister and foreign minister as well as the central bank governor today to discuss the latest developments and Paris’ plan of action.
Christian Estrosi, France's former industry minister and a close ally of Sarkozy within the ruling UMP party, called the Greek decision 'totally irresponsible'.
No date has been set for the referendum but it will be the first in Greece since 1974, when the monarchy was abolished by a landslide vote months after the collapse of a military dictatorship.
Mr Papandreou's decision means voters will be asked to approve a €100billion (£86billion) deal that would see 50 per cent of the country’s debts written off – but also see harsh austerity measures imposed for years to come.
His decision stunned European leaders as a ‘no’ vote would prove catastrophic for the EU and could prompt a disorderly default on the country’s debts and an exit from the euro.
One recent poll showed that 59 per cent of Greeks think the new package is ‘negative’ or ‘probably negative’ for their country.
The turmoil in Europe has also seen a 228-year-old U.S. brokerage firm, MF Global, file for bankruptcy after suffering massive losses gambling on eurozone bonds.
The firm was founded by sugar broker James Man in 1783 and is now led by former New Jersey governor and Goldman Sachs chief Jon Corzine.
Seen as a strong market player it had recently taken over five floors of offices in Canary Wharf.
But last week its share price plunged by 67 per cent after it unveiled a $6.3billion black hole due to holdings of Spanish, Italian and other eurozone bonds.
To add to the woes of European leaders, any expectations of a 'red knight' riding to the rescue of the euro zone are 'sorely misplaced', a former member of China's central bank monetary policy committee has said.
Writing in the Financial Times today Yu Yongding said China was willing and able to help and would be 'happy to invest in EFSF bonds in a measured way, as it has already done. If a eurobond should emerge, China should also invest'.
But he said: 'For Beijing, financial decisions should be based on financial considerations. Do not blame it if China's help is short of your expectations. China has never claimed it can save you from the debt dragon - and, on its own, it will not.'
Efforts to coax China into throwing the euro zone a lifeline will dominate this week's G20 Summit in Cannes, France.
The head of Europe's rescue fund sought to entice China on Saturday to invest in the facility by saying investors may be protected against a fifth of initial losses and that bonds could eventually be sold in yuan if Beijing desired.
Klaus Regling was in China to persuade Beijing to stump up money and help the euro zone beat its two-year debt crisis. He said the European Financial Stability Facility (EFSF) may invest in a special purpose vehicle and absorb the first 20 per cent of losses.
Though China has expressed confidence that Europe can survive its crisis, it has made no public offer to buy more European government debt.
'Since the beginning of Europe's sovereign debt crisis, Beijing has repeatedly expressed its wish to offer 'a helping hand' to Europe,' the former adviser to China's central bank said.
'Euro zone countries, however, have to understand that they will have to save themselves. Expectations of a "red knight" riding to the rescue are sorely misplaced.'
An English-language commentary on the state-run news agency Xinhua on Sunday used similar language, saying: 'China can neither take up the role as a saviour to the Europeans, nor provide a "cure" for the European malaise.'
Mr Yu said bailing out EU countries with Chinese money was hard for the Chinese people to accept. 'The Chinese people will ask: if Germans do not want to contribute more money, why should China bother?'
However Eurogroup chairman Jean-Claude Juncker said on Sunday Europe did not need China to solve its crisis and any investment would not involve political concessions from Europe.
Analysts have warned of the dire consequences if Greece's voters dismiss the deal.
Michael Hewson, analyst at CMC Markets said: 'What happens if Greece votes “no”, which is possible given how unpopular the bailout plan appears to be amongst Greece’s voters?
'The resulting fallout could well result in a complete meltdown of the European banking system and throw Europe into turmoil.'
Gary Jenkins of Evolution Securities added: 'If the Greek population votes against, it will leave the IMF and Greece’s European partners in a very difficult situation and seriously increase the risk of an exit from the currency union.
'I mean lets be fair, the EU hardly has a Plan A, so if that gets rejected there really isn’t a Plan B to turn to with regard to Greece.'
'They may be able to tweak the agreements here and there, but a whole scale new approach to the Greek problem is very unlikely. It raises the prospect of a disorderly default and an exit from the EU.'
WHY THE GREEKS WOULD SAY 'NO' TO EUROZONE DEAL
Income tax threshold would be lowered from €12,000 (£10,300) to €5,000 (£4,300)
Retirement age would be raised from 61 to 65
VAT would rise from 19 to 23 per cent
Higher property taxes
Monthly pensions above €1,000 (£860) would be cut by 20 per cent
Excise on fuel, cigarettes and alcohol would rise by a third
To qualify for a full pension people would be required to complete 40 years work
Retirees aged under 55 would lose 40 per cent of their pensions over €1,000 (£860)
Public sector wages would be cut by 20 per cent
Employees of state-owned enterprises would have their wages cut by 30 per cent
A cap would be introduced on wages and bonuses
30,000 civil servants would be suspended on partial pay
All temporary contracts for public sector workers would be terminated.
Just one in 10 civil servants retiring this year would be replaced
New levies on household incomes of between one and five per cent
Enlarge
Surprise, surprise: Papandreou delivers his announcement to the members of ruling PASOK party's Parliamentary group at the Greek Parliament in Athens
Last night Martin Callanan, Conservative leader in Brussels, said: ‘Are we witnessing the turning point in the eurozone crisis?
It's up to them: William Hague says the matter of a referendum is for Greece to decide
Surely Greece must now leave the euro. It is clearly incapable of bringing its deficit under control.’
The extraordinary twist came as a leading international think-tank warned that failure to tackle the eurozone debt crisis could trigger another recession as brutal as after the collapse of Lehman Brothers.
With growth figures of around 0.4 per cent for the latest quarter expected for Britain today, the Organisation for Economic Co-operation and Development predicted that the eurozone will come close to an economic halt next year, with growth of 0.3 per cent.
Such a slowdown in Europe would badly dent Britain’s growth prospects, with Chancellor George Osborne already looking certain to have to massively downgrade growth forecasts next month.
The OECD called for bold action at a G20 summit in France this week to stave off the threat of global disaster.
It predicted a ‘marked slowdown’ in the single currency bloc with ‘patches’ of recession. But it said the outcome could be much worse if leaders fail to shore up the eurozone and stop the crisis spreading from Greece and Portugal to larger countries such as Italy and Spain.
A repeat of the financial crisis of 2007-09 could wipe 5 per cent off the GDPs of major economies by the first half of 2013, said OECD secretary general Angel Gurria.
In Britain hopes of an economic recovery were boosted slightly as official figures revealed that the pace of growth accelerated faster than expected in the third quarter of 2011.
GDP increased by 0.5 per cent in the three months to the end of September, representing an improvement on the 0.1 per cent rise in the previous quarter, the Office for National Statistics revealed.
David Cameron yesterday warned against talking down the British economy and pledged an ‘all-out mission’ to promote growth.
‘Above all, at home and abroad, we must counsel against the pessimism and fear that can become self-fulfilling prophecies in global markets,’ he said.
But a second global watchdog said the world economy is on the verge of a major jobs crisis as the recovery in the West runs out of steam.
The International Labour Organisation, part of the United Nations, said it would take at least five years for employment in advanced economies to return to pre-recession levels.
‘The next few months will be crucial for avoiding a dramatic downturn in employment and further aggravation of social unrest,’ said ILO director Raymond Torres.
Stock markets around the world tumbled yesterday as investors lost faith in the credibility of the eurozone deal. The FTSE 100 index dived 158.02 points to 5544.22 – wiping £41billion off the value of Britain’s leading companies.
Italian borrowing costs rose above six per cent as the country’s towering debts – and the lack of political will to deal with them – alarmed investors about the stability of the EU’s third largest economy.
‘Time to forget Greece, Italy is the most scary guest at this eurozone Halloween party,’ said Louise Cooper, markets analyst at BGC Partners.
Economists had predicted a figure of between 0.3 per cent and 0.4 per cent as joblessness hit record levels.
Mr Gurría urged Britain to hold its nerve and stick to austerity measures set out in the coalition agreement.
‘In many cases, when you have a very large deficit, and that was certainly the case of the UK, you have to give signals that you are no longer choosing or wavering.
‘Very, very strong signals in the direction that you want to go in that will give confidence and power to the country in the markets. That’s exactly what happened,’ he said.. -
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