Eurozone ultimatum to Greece: put up or get out
The leaders of Germany and France told Greece last night it would not receive another cent in European aid until it decides whether it wants to stay in the eurozone.
They also made clear that saving the euro was ultimately more important to them than rescuing Greece.
After emergency talks with Greek Prime Minister George Papandreou, German Chancellor Angela Merkel said: "We would rather achieve a stabilisation of the euro with Greece than without Greece, but this goal of stabilising the euro is more important."
Mr Sarkozy hammered home the same message, saying: "Our Greek friends must decide whether they want to continue the journey with us."
Mr Papandreou outraged European partners and caused panic on the financial markets by announcing on Monday that Greece would hold a referendum on plans for a second bailout.
The Greek leader, looking chastened after a torrid dinner with European Union decision-makers that Ms Merkel called "tough and hard" on the eve of a summit of G20 major world economies, said the referendum would take place around December 4.
"It's not the moment to give you the exact wording, but the essence is that this is not a question only of a programme, this is a question of whether we want to remain in the eurozone," Mr Papandreou said.
Despite opinion polls showing a majority of Greeks, weary of two years of deepening austerity, think the bailout package was a bad deal for Greece, he said he expected more support from the wider population than he could muster in parliament.
"I believe the Greek people are wise and capable of making the right decision for the benefit of our country," he said.
Mr Sarkozy and Ms Merkel said eurozone finance ministers would meet next Monday to speed up decisions on leveraging the zone's rescue fund to build a firewall to protect other weaker members of the 17-nation currency area.
The EU and IMF said Greece would not receive an urgently needed ¿8bn aid instalment, due this month, until after the vote because official creditors wanted to be sure Athens would stick to its austerity programme.
European Commission President Jose Manuel Barroso delivered this message to Mr Papandreou before his arrival in Cannes, EU sources said.
This was after the Greek leader sent a letter to EU leaders saying he wanted to negotiate the details of the second package before the referendum. The letter angered European officials, raising the level of mistrust towards Greece.
Mr Papandreou said Greece had enough money to keep running until mid-December, when it has to redeem more than ¿6bn in debt.
Mr Sarkozy's office said several eurozone leaders attending the G20, including the Spanish and Italian prime ministers, would meet this morning in Cannes to review the crisis.
In fresh signs of the market turmoil unleashed by the Greek move, the eurozone's EFSF rescue fund, which lends money to troubled member states, was forced to put on hold plans to raise ¿3bn in the bond market.
And Italy's financial stability panel said some Italian banks were having difficulty raising money on international markets.
Asian G20 members piled pressure on Europe to tackle the crisis before it wreaks serious harm on the world economy.
China's deputy finance minister, Zhu Guangyao, said he hoped the uncertainty over the Greek referendum could be contained, adding that Beijing could not consider investing more in the eurozone's bailout fund given the lack of detail on proposals to leverage it.
If Mr Papandreou loses the referendum, Greece faces a disorderly default which would hammer Europe's banks and threaten the much larger economies of Italy and Spain, which the bloc may not have the means to bail out.
The chairman of eurozone 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."
Doubt about Europe's ability to contain the debt crisis has once more sent markets into a spin and put Italy firmly in the firing line.
The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high on Tuesday, despite European Central Bank buying of its bonds.
Italian Prime Minister Silvio Berlusconi scrambled to come up with measures to placate markets, holding an emergency cabinet meeting to accelerate budget reforms amid mounting calls for his resignation.
reports, analysis: business supplement