November 2, 2011 / 3:22 PM / 6 years ago

Sarkozy, Merkel to grill Greek PM on referendum

Greece's Prime Minister George Papandreou arrives for a cabinet meeting inside the parliament in Athens November 1, 2011.Yiorgos Karahalis

PARIS/ATHENS (Reuters) - Greece's prime minister faces a grilling from the leaders of Germany and France on Wednesday after fighting to win the backing of his cabinet to hold a referendum on a 130-billion-euro ($178-billion) bailout package.

French President Nicolas Sarkozy and Germany's Angela Merkel summoned George Papandreou for crisis talks in Cannes, before a G20 summit of major world economies, to push for rapid implementation of measures to tackle the euro zone debt crisis, which Athens has thrown into doubt.

Sarkozy said the referendum announcement "took the whole of Europe by surprise" and his Europe minister, Jean Leonetti, told Reuters it should be held as soon as possible and preferably before mid-December.

Opinion polls suggest most Greeks think the deal thrashed out by euro zone leaders last week is a bad one, but much will depend on how Papandreou frames the debate, either on the bailout -- and the painful cuts it demands -- or membership of the euro, which remains popular.

Greece's European partners will press for the latter.

"The referendum raises a fundamental question -- do you or do you not want to remain in the euro zone because if you do not accept the accord then that means not staying in the euro zone," Leonetti said.

Win or lose, Papandreou's gamble guarantees weeks of uncertainty just as the 17-nation European currency area is desperate for a period of calm to implement the remedies agreed to corral its sovereign debt crisis.

Some of Papandreou's party 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 inside and outside Greece on our European course and participation in the euro," Papandreou told a cabinet meeting that lasted seven hours.

Even if he wins the confidence vote, the euro zone faces a period of policy vacuum in which markets can create havoc. Lose and Greece faces a disorderly default which would hammer Europe's banks and threaten the much larger economies of Italy and Spain, which the bloc may not have the means to bail out.

As a result, the Greek premier's move has aroused anger and surprise in equal measure around the world.

"That's enough now: Greeks out!" Kronen Zeitung, Austria's biggest-selling paper, said on its front page.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package and Japanese Finance Minister Jun Azumi said: "Everyone is bewildered."

Juncker, European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, IMF chief Christine Lagarde and an ECB official will also attend Wednesday's talks in the southern French resort town.

Ecb in Spotlight

Doubt about Europe's ability to contain the debt crisis has once more sent markets into a spin and put Italy firmly in the firing line.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, despite European Central Bank buying of its bonds.

Ireland's finance minister said the ECB would be forced to pledge "a wall of money" to buy bonds, something many of its policymakers are deeply uncomfortable about.

Until the Greek situation is clearer, last week's package of measures is likely to be in limbo, leaving the ECB as the only bulwark against market attacks.

Greece's Prime Minister George Papandreou holds a news conference at the end of a euro zone summit in Brussels, October 27, 2011.Yves Herman

The head of Germany's banking association, Michael Kemmer, said agreement on a 50 percent writedown of Greek debt by its private creditors would have to wait. "I can't imagine a debt exchange taking place before the referendum," he said.

Greek Conservative opposition leader Antonis Samaras said Papandreou had acted as a one-man roadblock.

"How can banks accept a haircut on their debt if they don't know if Greece accepts it in the first place?" he told lawmakers in a speech. "Papandreou has put the country in the center of a global storm ... a government in such a state of panic is dangerous and must leave as soon as possible."

Meanwhile, another premier under fire, Italy's Silvio Berlusconi scrambled to come up with measures to placate markets, seeing senior aides and ministers ahead of an expected meeting of the cabinet later.

Timing, Result in Doubt

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.

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".

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 has made G20 host Sarkozy's efforts to coax big emerging nations such as China or India into throwing the euro zone a financial lifeline immeasurably more difficult and left his hopes of a triumphal Cannes summit in tatters.

Papandreou's most immediate hurdle is a parliamentary confidence vote on Friday which he is far from certain to win. Legislators begin debating at 1600 GMT on Wednesday.

Six senior members of the ruling PASOK socialists 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 -- 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 PASOK lawmaker 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.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held, and elections would be likely instead which would also herald a period of uncertainty.

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.

Berlin said it was an open question whether the next tranche of international aid could be paid before the referendum.

"How things proceed is yet to be seen. But according to everything we hear from Greece, there is no urgent need for the payout until mid-December," said German finance ministry spokesman Martin Kotthaus.

Additional reporting by Ingrid Melander, Deepa Babington and Renee Maltezou in Athens, Yann Le Guernigou in Paris, Conor Humphries in Dublin, Matthias Sobolewski in Berlin; writing by Mike Peacock and Alison Williams; Editing by Janet Lawrence

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