Second, some banks that hold Greek debt started expressing reservations about the agreed-upon 50 percent debt reduction -- a haircut they had initially hoped to keep to 21 percent. This puts back on the table the threat of a very chaotic and disruptive Greek default. It also places a question mark on the robustness of the cooperative public-private approach that is central to solving Europe's crisis -- and the banks' reluctance has only increased since Papandreou's announcement of the referendum.
Third, the European Central Bank (ECB) has proved less than fully effective in stabilizing the interest rates on debt issued by other European economies, particularly that of Italy. Despite purchases by the ECB, the interest rate on Italian 10-year bonds has broken above 6 percent, more than double the level considered safe. The spread between the rates on Italian and German bonds -- a market measure of credit risk -- reached a new eurozone record. While it is not clear whether it is an issue of willingness or ability on the part of the ECB to stabilize markets, the disappointment has added to market jitters.
Markets have predictably plummeted today, and European leaders must again scramble to put the pieces back together. In the process, they will try to catch up, or at least avoid falling further behind, in a crisis that is spreading well beyond the original confines of peripheral countries' sovereign debt problems. The banking sector is now contaminated, and there are growing concerns about the impact on core countries, including France's ability to retain its AAA rating.
No wonder there is tremendous pressure on Papandreou to reverse his referendum gamble -- and this pressure is coming from both inside and outside Greece. Meanwhile, banks are being reminded that the alternative to the 50 percent debt reduction is an even more drastic loss of value. And I suspect that the ECB is hearing calls to be more forceful in its efforts to stabilize markets.
These issues will undoubtedly feature prominently at the G-20 Summit in Cannes this week. Unfortunately, they will crowd out the type of deliberations needed on other topics that are also of central importance to the wellbeing of the global economy. Leaders who are preoccupied with the sovereign debt crisis are almost certain to once again fail to formulate a much-needed global employment and growth pact. They also may fail to address the historic developments in North Africa and the Middle East -- where some economies need support as desperately as Europe's vulnerable economies -- that have occurred since the last G-20 meeting, to say nothing of the still-pressing issue of climate change.
Only last week, the hope was that after endorsing the outcome of the European summit, members of the G-20 would agree to supportive measures and also address the other big issues ailing the global economy. Expectations are now quickly ratcheting down, with the greatest optimists limiting their hopes to a new emergency Band-Aid for Europe. In the process, the outlook for global growth and jobs dims a little more.