Greek Cabinet Backs Referendum; Papandreou Sacks Military Chiefs

Greece's prime minister won the backing of his Cabinet Wednesday to hold a referendum on a 130 billion euro bailout package but will find the stunned euro zone leaders who engineered the deal last week harder to convince.

Some of George Papandreou's own party lawmakers called for him to quit, accusing him of endangering Greek euro membership with his shock decision to call a popular vote, a move that pummeled the euro and global stocks. But the Cabinet support at least gives him a stay of execution before a confidence vote in Parliament on Friday.

The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro, Papandreou told a Cabinet meeting that lasted seven hours, a statement from his office said. No one will be able to doubt Greece's course within the euro.

Papandreou also replaced Greece's military chiefs Tuesday night, a move the opposition called a bid to stack the armed forces with loyalists before a possible government collapse over the country's debt crisis, Reuters reported.

The socialist government replaced the heads of the army, navy and air force and the chief of joint chiefs of staff in what officials described as a long-planned move largely unrelated to political turmoil.

We won't accept this decision, the main opposition conservative New Democracy party said.

Greek governments have exerted tight control over the country's armed forces since the end of the seven-year military dictatorship in 1974.

Army chiefs are often selected on the basis of party loyalty as part of a deeply-entrenched system of political patronage. The outgoing military leadership was appointed in August 2009 by the previous conservative administration, just before national elections were called.

After the show of unity at home, Papandreou will face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal.

Papandreou's gamble guarantees weeks of uncertainty just when the 17-nation European currency area is desperate for a period of calm to implement the remedies agreed to overcome its sovereign debt crisis.

This announcement took the whole of Europe by surprise, French President Nicolas Sarkozy said in a rare televised address on the steps of the Elysee Palace in Paris. The plan ... is the only way to solve Greece's debt problem.

Japan's finance minister, Jun Azumi, echoed his comments, as the Nikkei share average fell 2.2 percent on Wednesday. Everyone is bewildered, he said.

TIMING, RESULT UNPREDICTABLE

Greek government spokesman Ilias Mosialos said the referendum would take place as soon as possible, right after the basics of the bailout deal are formulated.

Greek officials have suggested it would probably be held in mid-January but the interior minister said it could happen as early as December, if details of the bailout agreement are nailed down earlier than envisaged.

Opinion polls suggest most Greeks think it is a bad deal, but much will depend on how Papandreou frames the debate, either on the bailout -- and hence the painful cuts that will follow -- or membership of the euro, which itself remains popular.

He is blackmailing us, said Yannis Aggelou, a 50-year-old sales manager at a steel company.

The Greek press, including dailies traditionally friendly to the government, almost unanimously condemned Papandreou.

Center-left newspaper Eleftherotypia described the prime minister on its front page as The Lord of Chaos. Ethnos, another pro-government paper, called the referendum suicidal.

What Papandreou did was irresponsible and dangerous, said the conservative daily Kathimerini in its editorial titled the Dance of self-destruction.

German Finance Minister Wolfgang Schaeuble told Wednesday's Financial Times Deutschland he was confident the Greeks would support the government's reforms in the referendum.

If Greece accepts the burden and efforts required by the aid programs, if it wants to stay within the euro zone, then we will support it, Schaeuble said.

Papandreou said Greece's partners would support its policies and the G20 meeting in Cannes should agree on policies that make sure democracy is above market appetites.

But his move is bound to embarrass G20 host Sarkozy as he tries to coax big emerging nations such as China or India into throwing the euro zone a financial lifeline.

Our assessment of the situation is, let them (euro zone leaders) make a credible assessment of the solvency issue, try to sort out those problems, and thereafter supplementary financing could be considered, Indian Finance Minister Pranab Mukherjee said.

A plebiscite could also further undermine political support in northern Europe for aiding Greece. The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

CONFIDENCE VOTE

Papandreou's most immediate hurdle is the parliamentary confidence vote on Friday. Legislators begin debating at 1600 GMT on Wednesday.

We believe the government will once again win a vote of confidence in order to proceed with its plans, government spokesman Angelos Tolkas told reporters. We will not back down on anything we have to do to save the country.

Six senior members of Greece's ruling PASOK socialists, angered by Papandreou's decision to call a referendum, said he should make way for a politically legitimate administration.

During the Cabinet meeting that wrapped up around 3 a.m., some ministers questioned the timing of the popular vote and criticized the fact they had been kept in the dark -- even the finance minister had not been told by Papandreou -- and a handful were openly against it, government sources said.

I think this was the wrong decision and we must take it back, one minister was quoted as saying. We must not risk our position in the euro.

A leading PASOK lawmaker earlier quit the party, narrowing Papandreou's slim majority to 152 of 300 seats, and several others called for a government of national unity followed by a snap election, which the opposition also demanded.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held, and there is still plenty of dissent.

For the first time we are admitting publicly that our policy lacks legitimacy, one minister said he told the meeting, speaking to reporters on condition of anonymity.

SHARES POUNDED

Doubt about Europe's ability to contain the debt crisis has once more sent investors fleeing from riskier assets across the world. Asian shares tumbled and the euro hovered near three-week lows against the dollar on Wednesday.

U.S. stocks fell more than 2.5 percent and European shares posted their worst one-day loss in more than a month on Tuesday.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, raising Rome's borrowing costs to above 6 percent -- levels that proved unsustainable for Ireland and Portugal.

European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent.

Greece is due to receive an 8 billion-euro IMF/EU aid tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a no vote.

Dutch Finance Minister Jan Kees de Jager said IMF might have difficulty paying out that tranche because of the looming referendum. I can imagine it will be difficult for the IMF to decide about the tranche but there will be uncertainty ... it is problematic, he told the Dutch parliament.

(Additional reporting by Ingrid Melander and Renee Maltezou in Athens, Michele Sinner in Luxembourg, Carmel Crimmins in Dublin, Martin Santa in Bratislava, Ana Nicolaci da Costa, Marius Zaharia, Jeremy Gaunt, Adrian Croft and Marius Zaharia in London, and Erik Kirschbaum and Madeline Chambers in Berlin; Writing by Dina Kyriakidou, David Stamp and Alison Williams; Editing by Mark Heinrich)