Europe leaders summon Greek PM to explain himself (AP)

CANNES, France ? Greek Prime Minister George Papandreou was flying to the chic French Riviera resort of Cannes on Wednesday to explain himself to European leaders furious over his surprise referendum on a bailout deal that took them months to work out.

French president Nicolas Sarkozy, German Chancellor Angela Merkel and top European Union officials arrived at the Palais des Festivals, site of Cannes' famous film festival, for private talks ahead of their meeting with Papandreou, scheduled for 19.30 GMT.

The pledge to hold a referendum has riled financial markets and threatens to derail a debt crisis plan that's not even a week old. A "no" vote in the referendum could lead to a disorderly Greek default and force Greece from the euro, toppling fragile banks and sending the global economy spinning back into recession.

Even scheduling the vote could scuttle pending payouts of bailout money Greece needs to avoid default. And the wait is 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 fates of some of the G-20 leaders could well hinge on how Papandreou's gamble works out, and hence how their own economies fare. For example, French President Nicolas Sarkozy and U.S. President Barack Obama both face potentially tough re-election battles within the year.

Sarkozy had hoped that the meeting of leaders from the Group of 20 industrial and developing nations, which runs Thursday and Friday, was going to be Europe's opportunity to tell the rest of the world that a comprehensive plan to deal with the debt crisis had finally been reached after nearly two years of half-measures, indecision and procrastination.

Papandreou's gambit put an end to that lofty ambition.

Sarkozy and German Chancellor Angela Merkel summoned Papandreou to the meeting on the Cote d'Azur and will continue to insist that the euro130 billion ($177 billion) deal thrashed out last week remains "the only possible way" to sort out Europe's Greek 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," German Chancellor Angela Merkel's spokesman, Steffen Seibert, said in Berlin.

"Countries in Europe ? particularly the countries in the eurozone ? are so closely integrated that every serious decision in one capital has effects on the other countries."

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," Charles Dallara, managing director of the Institute of International Finance, said in a conference call from Washington D.C.

Papandreou meets his peers just hours after winning the support of his Cabinet in a marathon meeting. He has said his hope is that a referendum will lock a restless and disgruntled country into continuing with its reforms that are widely seen as necessary if Greece is to have a sustainable future. Some 20 months of harsh austerity have angered most Greeks, with unions staging a seemingly unending wave of strikes and protest marches many of which have degenerated into riots.

EU Commission President Jose Manuel Barroso warned that a failure by Greeks to stick to last week's agreement would have unknown consequences.

"Without the agreement of Greece top the EU/IMF program, the conditions for Greek citizens would become much more painful, in particular for the most vulnerable," Barroso said in a statement after arriving in Cannes. "The consequences would be impossible to foresee."

Papandreou will try to convince his European peers that 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."

At one stage on Tuesday, following a rebellion among his governing Socialist lawmakers, Papandreou's government looked in danger. And he's not out of the woods yet: His government faces a confidence vote on Friday and his Socialists only have a two-seat majority.

Irish Finance Minister Michael Noonan said a quick referendum is the only way ? other than early elections ? to limit the damage, a sentiment which will be echoed by Sarkozy, according a French official speaking on condition of anonymity..

"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.

Greek Interior Minister Haris Kastanidis said Wednesday that the referendum could be held in December.

Already, the uncertainty surrounding the referendum is causing a delay in implementing the euro rescue plan.

The head of Germany's banking association, Michael Kemmer, said the planned bond swap by which banks will take a voluntary 50 percent cut in their Greek debt holdings will have to wait until after the referendum, if it takes place.

Kemmer says banks stand by the deal, but that the planned exchange can only happen when the Greek government makes a formal offer, and that doesn't make sense until after the referendum results are in.

The IIF's Dallara said he's confident a large majority of the banks and other investors represented by the IIF would sign on to the Greek debt reduction plan. He noted, however, that his organization doesn't represent all private holders of Greek debt.

The Oct. 27 bailout deal would require banks holding Greek government bonds to accept 50 percent losses and provide Greece with about $140 billion in rescue loans from European nations and the IMF. Greece has been relying on bailout loans since May 2010 to avoid bankruptcy.

European officials appear to be biding their time on whether Greece will get its hands on the next batch of bailout funds, worth euro8 billion ($10.9 billion), which had already been approved for payment sometime in November. German Finance Ministry spokesman Martin Kotthaus noted that Greece has "no acute need for payments until about the middle of December."

Meanwhile, Greece's European partners are suffering the consequences of the renewed uncertainty.

The yield on Italy's ten-year bonds ? a gauge of market concern ? rose from Tuesday's close to 6.18 percent. Though that's still below the 6.33 percent high hit at one point on Tuesday, it's still uncomfortably close to the levels that prompted Greece, Portugal and Ireland to seek financial bailouts.

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Sylvie Corbet in Cannes, Nicholas Paphitis and Theodora Tongas in Athens, Angela Charlton in Paris, Geir Moulson in Berlin and Shawn Pogatchnik in Dublin contributed to this report.

Source: http://us.rd.yahoo.com/dailynews/rss/eurobiz/*http%3A//news.yahoo.com/s/ap/20111102/ap_on_bi_ge/eu_europe_financial_crisis

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