CANNES, France (AP) — Greek Prime Minister George Papandreou flew to the chic French resort of Cannes on Wednesday to explain to his furious European colleagues why he was holding a surprise referendum on a bailout deal that took them all months to work out.
Papandreou’s pledge to let the Greek people themselves vote has riled financial markets and threatens to derail an entire European debt crisis plan that’s not even a week old. Observers called it a "back me or sack me" move to make sure the Greek public will support the severe austerity measures looming ahead.
But a "no" vote in the referendum would have enormous consequences not just for Greece but for the rest of Europe. It could lead to a disorderly Greek default, force Greece out of the 17-nation eurozone, topple many fragile European banks and send the global economy spinning back into recession.
With this in mind, French President Nicolas Sarkozy, German Chancellor Angela Merkel and top European Union officials gathered at the Palais des Festivals, site of Cannes’ famous film festival, for private emergency talks ahead of a meeting with Papandreou.
The pressure on Papandreou was mounting. European leaders "will not accept" it if Greece jeopardizes the rescue plan, Luxembourg Prime Minister Jean-Claude Juncker said after the first round of talks.
"All 17 of us made decisions a week ago," he said, urging Greece not to "dissociate itself" from those decisions. "The situation is serious."
Playing hardball, eurozone officials said an €8 billion ($11 billion) loan that Greece needs within weeks to avoid bankruptcy was conditional on Greece backing the latest rescue deal.
"If these (reforms) are now being put in question in December by the referendum, then we have a completely different situation," said one eurozone official, speaking on condition of anonymity because of the sensitivity of the issue.
The wait is also ramping up the pressure on Italy, the eurozone’s third-largest economy, whose debts are enormous but which is considered too big to be bailed out. The yield on Italy’s ten-year bonds rose to 6.19 percent Wednesday, uncomfortably close to the levels that prompted Greece, Portugal and Ireland to seek bailouts earlier.
Even the fates of some world leaders could hinge on how Papandreou’s gamble works out. Sarkozy and President Barack Obama both face potentially tough re-election battles within the year.
Sarkozy had hoped the meeting of leaders of the Group of 20 leading world economies, in Cannes on Thursday and Friday, would be Europe’s chance to assure the rest of the world that a comprehensive plan to deal with its debt crisis had finally been reached after nearly two years of half-measures and procrastination.
Papandreou’s gambit ended that lofty ambition.
Sarkozy and Merkel summoned Papandreou to Wednesday’s meeting, continuing to insist that the bailout deal for Greece thrashed out last week remains "the only possible way" to sort out Europe’s debt problem.
"Germany and the entire international community are striving to deal in solidarity and responsibly with Greece, but there is also a responsibility on Greece’s part toward its European partners," Merkel’s spokesman, Steffen Seibert, said in Berlin. "Countries in the eurozone are so closely integrated that every serious decision in one capital has effects on the other countries."
Since May 2010, Greece has been relying on bailout loans to avoid bankruptcy. The Oct. 27 bailout deal would require banks holding Greek government bonds to accept 50 percent losses, while the other eurozone nations and the IMF would provide Greece with about $140 billion more in rescue loans.
The head of the global banking lobby that negotiated the debt reduction deal pressured the Greeks to accept the deal.
"It is important for the Greek people to understand that the hardships of the last 18 months are more likely to moderate with the package than in absence of it," said Charles Dallara, managing director of the Institute of International Finance.
Papandreou arrived just hours after winning the support of his Cabinet in a marathon meeting. Some 20 months of harsh austerity have angered most Greeks, with unions staging a seemingly unending wave of strikes, protests and even riots. The prime minister says he hopes the referendum will force a disgruntled nation into continuing with its financial reforms, widely seen as the only way to avoid a Greek bankruptcy.
"Without (the deal)…, the conditions for Greek citizens would become much more painful," warned EU Commission President Jose Manuel Barroso.
Papandreou will try to convince his European peers the referendum is needed. He said it "will be a clear mandate, and a clear message within and outside of Greece, about our European course and our participation in the euro."
However, some of his own Socialist lawmakers revolted against the vote, and his government faces a confidence vote Friday with only a two-seat majority in parliament.
Irish Finance Minister Michael Noonan said a quick Greek referendum is the only way — other than early elections — to limit the damage, a sentiment sure to be echoed by Sarkozy and Merkel.
"If we had to go through Christmas and the New Year waiting for the Greeks to make a decision, it would make things even more chaotic," Noonan said.
One Greek official said the referendum could be held in December.
Already, the uncertainty surrounding the referendum was causing delays in the euro rescue plan.
The head of Germany’s banking association, Michael Kemmer, said a planned bond swap in which banks will take a voluntary 50 percent cut in their Greek debt holdings will have to wait until after any referendum.
Meanwhile, the European Financial Stability Facility, the eurozone bailout fund that finances large parts of the rescue loans for Ireland and Portugal, on Wednesday had to delay a €3 billion ($4.1 billion) bond issue for Ireland because of the current "market environment," said spokesman Christof Roche. He said the bond issue would go ahead, but not this week.
Anti-capitalist protesters have targeted the G-20 meeting in Cannes, calling for more equitable use of rich countries’ resources. Some activists jumped into the Mediterranean Sea on Wednesday, urging G-20 leaders to stand up to financial markets and take bolder risks to help needy people.
