Greece's Papandreou heading to EU showdown

[November 02, 2011]  ATHENS, Greece (AP) -- Greek Prime Minister George Papandreou will try to win over irate European leaders later Wednesday, hours after persuading his cabinet to back a hugely controversial referendum on the debt-crippled country's latest rescue package.

Papandreou's gamble to put the hard-won euro130 billion ($177 billion) deal to his austerity-fatigued electorate caused market turmoil Tuesday as investors fretted over the prospect of a disorderly Greek debt default and the country's exit from the euro.

His announcement also sparked a rebellion among his governing Socialist lawmakers. A crucial test of party loyalty will come during a vote of confidence on Friday in parliament, where the Socialists have a two-seat majority.

Later Wednesday, Papandreou faces a grilling from German Chancellor Angela Merkel and French President Nicolas Sarkozy among others in Cannes in the French Riviera, ahead of the Group of 20 summit. Papandreou is due to fly out early afternoon along with finance minister Evangelos Venizelos, who was discharged from hospital earlier after complaining of stomach pains Tuesday.

Papandreou's referendum call has been met with barely-disguised anger in Europe and officials are scrambling to understand his motivations.

Irish Finance Minister Michael Noonan said the only way to limit the damage was for Greece to hold the referendum -- or early elections -- as soon as possible.

"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.

Leaders are alarmed because a "no" vote could send shockwaves through the European banking system and the already-weak economy. Even setting a vote could scuttle pending two large pending payouts of bailout money Greece needs to avoid default. And the wait for a result will increase bond market pressure on Italy and Spain, who face rising interest rates because of fears they may default too.

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.

"I believe that the second aid package for Greece, which will now be finalized, offers the best guarantee for Greece to be able to recover in a clear process and get back on its feet independently," German finance minister Wolfgang Schaeuble said in an interview with the Financial Times Deutschland newspaper . "I assume that Greece will respect and fulfill the agreements and commitments that it made."

During a grueling seven-hour Cabinet meeting in Athens that finished after 3 a.m. (0100GMT), Papandreou told his ministers that putting the issue to the Greek people was the only way to safeguard the European deal.

"We will not implement any program by force, but only with the consent of the Greek people," he said, according to a text of his speech to the meeting issued by his office. "This is our democratic tradition and we demand that it is also respected abroad."

Government spokesman Ilias Mossialos said Papandreou's ministers expressed "total support for the initiatives taken by the prime minister." He said the referendum would be held "as soon as possible."

However, government officials said two ministers still had strong reservations with the idea of a referendum, which will be the first in Greece since the country voted to abolish the monarchy in 1974. The officials spoke on condition of anonymity to reveal details of the Cabinet meeting.

Papandreou said a referendum "will be a clear mandate, and a clear message within and outside of Greece, about our European course and our participation in the euro"

"The dilemma is not 'this government or another one', the dilemma is 'yes or no to the agreement', 'yes or no to Europe', 'yes or no to the euro,'" he said.

That gives the closest indication of how the question in the referendum could be phrased -- an issue the government has not clarified. Setting the dilemma in bleak terms of maintaining Greece's cherished euro membership or not would make approval much likelier than a more specific question on the terms of the bailout.

Some 20 months of harsh austerity have angered most Greeks, with unions staging a wave of strikes and protest marches many of which degenerated into riots.

Under a recently amended law, a referendum can be called on issues of grave national concern, but needs approval by an absolute majority in the parliament.

[Associated Press; By ELENA BECATOROS and DEREK GATOPOULOS]

Nicholas Paphitis and Theodora Tongas in Athens, Angela Charlton in Paris, Geir Moulson in Berlin, David McHugh in Frankfurt and Shawn Pogatchnik in Dublin contributed.

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