Greeks warned over bail-out snub

European leaders are facing weeks of uncertainty and potential market instability until it becomes clear whether the Greek electorate will accept a bail-out plan designed to stop the country defaulting on its debts.

Question marks also surround whether Greece can remain a member of the euro, with the position of the country’s increasingly beleaguered Prime Minister George Papandreou uncertain.

Mr Papandreou was summoned to crisis talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday over a decision to allow a referendum on the 130bn euro (£112bn) bail-out package that was floated last week.

Domestically he faces a vote of confidence tomorrow in the Athens parliament, with several members of his own party having called for him to resign. One member of the government has quit in protest at his leadership and others have threatened to follow.

The issue will unquestionably be the focus of today’s G20 summit in the French Riviera resort of Cannes.

Mr Sarkozy has said Mr Papandreou’s announcement of a referendum “took the whole of Europe by surprise” while Mrs Merkel struck the same tone of exasperation and impatience.

“We agreed a plan for Greece last week. We want to put this plan into practice, but for this we need clarity and the meeting tonight should help with precisely this,” she said.

French officials said Mr Papandreou would be pressed to put the bail-out deal to parliament before the referendum, in the hope of reassuring financial markets, and to hold the plebiscite by mid-December to avoid months of uncertainty.

European Commission chief Jose Manuel Barroso urged Greeks to unite in support of the bail-out plan, warning that the alternative would be too ghastly to predict.

“Without the agreement of Greece to the EU/IMF programme, the conditions for Greek citizens would become much more painful, in particular for the most vulnerable. The consequences would be impossible to foresee,” he said.

However, opinion polls in Greece suggest most people think the deal thrashed out by eurozone leaders last week is a bad one and much will depend on how Mr Papandreou frames the debate, either on the bail-out – and the painful cuts it demands – or membership of the euro, which remains popular.

EU and IMF board sources both said Greece would not receive an urgently needed 8bn euro (£6.9bn) aid instalment, due this month, until after the vote because official creditors wanted to be sure Athens would stick to its austerity programme.

Global markets were panicked into steep falls on Tuesday by Mr Papandreou’s shock announcement and Greek sources said yesterday that the national poll could be held as early as next month.

European leaders had been hoping for a period of calm in which to finalise the details of last week’s deal, which envisages banks taking a 50 per cent “haircut” on Greek debts while the eurozone bail-out fund is boosted to one trillion euros (£870bn).

Confusion also surrounds the third element of the rescue package – a firewall fund to prevent contagion in future crises and how it will operate. Some have suggested that the eurozone could set up an IMF-administered special purpose vehicle, funded in part by cash-rich trade-surplus countries such as China.

Mr Sarkozy was set to argue the case for Beijing to supply funds at an eve-of-summit dinner with Chinese president Hu Jintao last night, although his negotiating position has been undermined by Mr Papandreou’s surprise announcement.