Beware of Greeks bearing gifts, runs the cliché. And Greek Prime Minister George Papandreou’s gift of democracy is one that is very definitely unwanted in Europe. No wonder the Germans regard Greeks as shifty avoiders of responsibility for their own actions.

Papandreou’s stunt to call a referendum on the latest bailout package and the austerity cuts needed to qualify, is backfiring on him and his government, as well as roiling markets and sending his fellow EU leaders reaching for the stress pills again. According to this morning’s media reports, it could see him lose his job. Just before deadline, there were reports Papandreou’s cabinet had backed his referendum plan after an emergency meeting overnight.

There were two more defections from his Socialist parliamentary group on Tuesday and the threat of a third, which suggests he may lose Friday’s vote of confidence, triggering the early poll that he was trying to avoid. The Greek parliament is due to start a three day debate tonight on the referendum with a vote scheduled for Friday night, Australian time. If it is approved, the vote will be held next January, just when Greece will be running out of bailout funds with the latest 8 billion euros due to be paid over in the next 10 days. If that payment is delayed or isn’t made for any reason, Greece could implode almost immediately.

The news stunned European leaders and forced France and Germany leaders and officials to hold a series of telephone meetings. Germany’s Angela Merkel and France’s President Sarkozy said they will meet the Greek Prime Minister tonight, our time to discuss the issue and what can be done to kill off the idea. The G20 leaders meeting starts in Cannes tomorrow and finishes Friday night. The poll will be top of the agenda as will its possible impact on the euro deal and the latest Greek bailout.

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Papandreou’s decision, announced on Monday, took his government, the country and the rest of Europe by surprise. A poll last week showed 60% of Greeks opposed to the bailout and the stiff austerity terms. Saying “no” would mean the Greeks were not prepared to cut spending and debt to be bailed out by the rest of the eurozone (the ECB, EU and, probably, the Chinese and the IMF). In effect the Greeks would be saying “yes” to default, which would happen almost immediately. It won’t be “orderly”, but very messy indeed, freezing financial markets, halting bank lending and, quite possibly, plunging the rest of Europe into a recession, or further into recession for those countries already struggling.

The worst case outlook says that recession would roll across the US, Asia, Australia, the UK in a re-run of the aftermath of the collapse of Lehman Brothers in New York in September 2008. The killer would be the freezing of markets, which would force central banks to again rescue banks and economies across the globe. Millions of jobs will again be lost, playing out a scenario scarily like the early 1930s.

The date of the referendum being mooted is mid-January — which means even a “yes” vote would come after months of more uncertainty.

Gold rose slightly, but oil and copper fell and the Australian dollar lost another cent, on top of the losses from the RBA cut yesterday. Sharemarkets in Europe fell between 2% and nearly 7%, the relief rally of last week a long way in the rearview mirror. Ever since the bailout deal was announced, the markets have slowly been realising what many analysts and commentators spotted immediately, that the deal is mostly vague intentions and talking points. So we saw a second day of selling last night, only this time more desperate and targeted on banks in Europe.

In the US, markets fell by 2% or more and 10 year US bond yields fell to 2%, down from 2.31% last Friday, as investors charged off for the safely of US dollar government bonds. The shares of European bank shares plunged, especially in France and Italy.

Our market is down by more than 2.5% since Monday, despite yesterday’s rate cut. Those fears about Europe are real.

The news has seen the cost of Italian debt rise past 6% again (to a new high of 6.33%), rising fears it will be next to need help funding itself. The European Central Bank bought a reported 5 billion euros of Italian bonds to steady the market, the second such intervention in five days.

The US Federal Reserve started a two day meeting overnight Tuesday and the news from Greece won’t have thrilled it. The looming eurozone recession threatens to roll over the US economy, which in recent days has looked like climbing off the canvas, and then other major economies, including China, especially if there’s continuing financial instability. There’s discussion once again — some may remember it from 2008 — about how “decoupled” Asia and particularly China now is from Europe and the US.

Nor will it have been greeted warmly at the Reserve Bank of Australia which yesterday cut rates here for the first time in 31 months, a move that seemed to be based on a bit of insurance for Australia should Greece and Europe continue to worry markets, as they are doing. “It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households,” said Glenn Stevens in his post-meeting statement.

Papandreou — if he lasts — seems intent on ensuring “concerns about the European situation” aren’t laid to rest for a long time to come.