Greek Prime Minister George Papandreou faces a difficult conversation with his French and German counterparts in Cannes on Wednesday after his cabinet approved a decision to hold a referendum on the €130bn (£112bn) bailout package for the country agreed less than a week ago.
Papandreou's announcement shocked global markets, which had rallied on the hopes that a deal had finally been done to mark the beginning of the end of the eurozone's sovereign debt issues.
With many Greeks angry that a deal was being imposed on them by external parties, putting the acceptance of the bailout deal to a public vote is a huge gamble for the prime minister. However, it offers him the chance to add a veneer of domestic legitimacy to an otherwise entirely international deal. Other analysts have suggested that the Greek government is making a play to get better terms for its bailout deal, effectively holding the eurozone to ransom.
According to a statement issued by Papandreou's office, the prime minister told Tuesday's emergency cabinet meeting: "The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro."
Political analysts said that among the most pressing concerns is just what the €130bn question will be. With so much at stake - including Greece's membership of the single currency area - the phrasing of the referendum motion will be critical.
To leave the euro would potentially be even more damaging than the austerity option, with a depreciating drachma and hyperinflation creating almost inevitably resulting. Polls show that a majority of the Greek people would prefer to stay within the eurozone.
However, many in Greece are also opposed to the strict terms of the bailout package and to external intervention.
"These positions are clearly incompatible," Matthew Lynn at Strategy Economics said.
"Moreover, the record of referenda on EU issues suggests that the outcome is usually ‘no’. The Irish rejected the Lisbon Treaty in a vote in 2008. The French voted against the proposed EU constitution in 2005. The key issue will be how the debate progresses.
"If the debate turns on fear, with constant threats of catastrophe if Greece says ‘no’, and if those threats are credible, then the chances of a yes vote will increase. The trouble is, if those threats come from abroad, and particularly from Germany, then they will simply stoke opposition to the euro."
The referendum is due to take place as soon as the details of the bailout are finalised - an uncertain deadline in itself - though Papandreou first has to pass a confidence vote on Friday.
"The most market friendly scenario is perhaps that the current government lose the vote on Friday and the pro-European opposition New Democracy Party win a pre-Christmas election and have a clear mandate to press on with whatever austerity the Europeans impose on them in their latest bail-out package," Deutsche Bank strategist Jim Reid wrote on Wednesday morning.
"The feeling is that while they might try to renegotiate parts of any EU package, it may only be over details rather than the essence of the deal. A referendum will also be avoided. The least market friendly outcome is a government win on Friday, many weeks of uncertainty over the referendum and then a 'no' vote. This would leave Europe's latest bail-out package in disarray and will likely increase the tail risk of an imminent Greek euro exit or a disorderly default."
The fallout from the announcement could be severe.
A key part of the eurozone's total bailout package included funding from other international governments, including the cash-rich emerging economies of China and Brazil. Eurozone officials were hoping to secure some tentative agreements at the upcoming G20 meeting in Cannes. There was only a remote chance of a meaningful commitment, but that chance is now even more remote.
"George Papandreou's surprise announcement to call a referendum on Greece's new bailout greatly reduced whatever chances were still present for G20 member states to commit funds to the eurozone," Eurasia analyst Courtney Rickett McCaffrey said.
"China and other BRIC countries have always made clear that any commitment of external funding toward the eurozone would be predicated first and foremost on a credible plan from eurozone leaders to tackle their crisis."Suggest a correction