Greek PM faces showdown talks with Merkel, Sarkozy (Reuters)

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.

"This announcement took the whole of Europe by surprise," Sarkozy said on the steps of the Elysee Palace in Paris. "The plan ... is the only way to solve Greece's debt problem."

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 last week 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.

"No one will be able to doubt Greece's course within the euro."

Even if he wins the confidence vote, the euro zone faces weeks of uncertainty in which markets can create havoc. Lose and Greece faces disorder which would hammer Europe's banks and threaten the much larger economies of Italy and Spain, which the currency bloc may not have the resources 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.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday to levels that proved unsustainable for Ireland and Portugal, despite European Central Bank buying of its bonds.

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

Until the Greek situation is clearer, key elements of the deal hammered out by euro zone leaders last week are likely to be unresolved, leaving the whole package in limbo and the ECB as the only bulwark against market attacks.

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.

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.

Opinion polls suggest most Greeks think it is a bad deal, 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.

"He is blackmailing us," said Yannis Aggelou, a 50-year-old sales manager at a steel company.

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.

"Our assessment of the situation is, let them (euro zone leaders) make a credible assessment of the solvency issue, try to sort out those problems, and thereafter supplementary financing could be considered," Indian Finance Minister Pranab Mukherjee said.

CONFIDENCE VOTE

Papandreou's most immediate hurdle is a parliamentary confidence vote on Friday which he is far from certain to win, given his narrow majority and increasing opposition within his own ranks. Legislators begin debating at 1600 GMT on Wednesday.

Six senior members of Greece's 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 by Papandreou -- 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 leading PASOK lawmaker earlier 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, which the opposition also demanded.

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 policy vacuum.

Doubt about Europe's ability to contain the debt crisis has once more sent markets into a spin.

The euro rebounded from a three-week low against the dollar as investors took a breather from a deep sell-off. World stocks also edged up after a steep sell-off.

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.

Dutch Finance Minister Jan Kees de Jager said IMF might have difficulty paying out that tranche because of the looming referendum. "I can imagine it will be difficult for the IMF to decide about the tranche," he told the Dutch parliament.

(Additional reporting by Ingrid Melander and Renee Maltezou in Athens, Yann Le Guernigou in Paris, Conor Humphries in Dublin, Matthias Sobolewski in Berlin; writing by Alison Williams and Mike Peacock; editing by Andrew Roche)

Source: http://us.rd.yahoo.com/dailynews/rss/business/*http%3A//news.yahoo.com/s/nm/20111102/bs_nm/us_greece_referendum

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