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Greece split over euro referendum Obama calls for urgent debt deal
(about 2 hours later)
   
Greece is to hold an emergency cabinet meeting after ministers broke ranks with the prime minister over the country's planned bailout referendum. US President Barack Obama has warned that there is still work to be done on how the eurozone can end a financial crisis that threatens engulf the world.
Finance chief Evangelos Venizelos led the revolt, saying the vote must not be about Greece's future in the eurozone. Speaking on Thursday ahead of the opening of the G20 summit in France, he said that the most important topic on the agenda was Europe's problems.
Greece's prime minister and eurozone leaders have tied the vote to whether Greece remains part of the euro bloc. Eurozone leaders wanted to present the G20 with a clear action plan, but Greece has thrown this into disarray.
The eurozone's woes are set to dominate two-days of talks at the G20 meeting of the world's largest economies. Prime Minister George Papandreou has offered to resign amid chaos in Athens.
His surprise plan to hold a referendum on Greece's latest bailout package has sparked further uncertainty about whether Europe can resolve its crisis.
Leaders are in Cannes at the G20 meeting of the world's biggest economies to discuss global growth and stability.
Mr Obama said: "The most important task over the next two days is to resolve the financial crisis in Europe.
"Here at the G20 we need to flesh out how the plan will be fully and decisively implemented."
'Historic conquest'
Eurozone governments struck a deal with Greece last week for a debt write-down and to bolster Europe's bailout fund and support the banking sector.
But it is feared that the package has begun to unravel.
Greece's decision to hold a referendum on the deal caused political upheaval in Athens and stunned the financial markets.
Mr Papandreou and other eurozone leaders have tied the vote to whether Greece remains part of the euro bloc.
But finance chief Evangelos Venizelos led the revolt against the referendum, saying the vote must not be about Greece's future in the eurozone.
Mr Venizelos issued a statement in the early hours of Thursday after attending crisis talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy.Mr Venizelos issued a statement in the early hours of Thursday after attending crisis talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy.
"Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt. This achievement by the Greek people cannot depend on a referendum," he said."Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt. This achievement by the Greek people cannot depend on a referendum," he said.
Mr Venizelos also said that the next 8bn-euros (£7bn) of European Union bailout aid should be released immediately. Mr Venizelos also said that the next 8bn euros (£7bn) of European Union bailout aid should be released immediately.
Earlier, Greece's Prime Minister George Papandreou said that his shock decision to call a national vote on the bailout package was effectively a decision on the country remaining part of the euro bloc.
Mrs Merkel and Mr Sarkozy had made clear that Athens would not receive its next tranche of emergency aid until the referendum had passed.Mrs Merkel and Mr Sarkozy had made clear that Athens would not receive its next tranche of emergency aid until the referendum had passed.
It is likely that a referendum will be held on 4 December. A referendum was likely to be held on 4 December, although there is now uncertainty about whether it will go ahead.
A cabinet meeting is due to be held in Athens at lunchtime. Earlier, Greek MP Dimitris Lintzeris described Mr Papandreou as "history". Eurozone leaders fear that should the Greek people deliver a "no" vote, it may plunge the country into a disorderly default and spread financial contagion to Italy and Spain.
Eurozone leaders fear that should the Greek people deliver a "no" vote it may plunge the country into a disorderly default and spread financial contagion to Italy and Spain.
"Our Greek friends must decide whether they want to continue the journey with us," Mr Sarkozy told reporters at a joint news conference with Mrs Merkel after the crisis talks with Mr Papandreou."Our Greek friends must decide whether they want to continue the journey with us," Mr Sarkozy told reporters at a joint news conference with Mrs Merkel after the crisis talks with Mr Papandreou.
Obama meetingObama meeting
Eurozone leaders had hoped to present a definitive action plan for Greece at the G20 meeting of the world's biggest economies. A key part of the rescue package to be presented to the G20 was a plan to encourage wealthy emerging economies to contribute to expanding the European Financial Stability Fund (EFSF).
A key part of the plan was to encourage wealthy emerging economies to contribute to expanding the European Financial Stability Fund (EFSF).
However, China made clear on Thursday that it would not commit to the EFSF until there was more clarity on the situation in Greece.However, China made clear on Thursday that it would not commit to the EFSF until there was more clarity on the situation in Greece.
US President Barack Obama is scheduled to hold a meeting with Mr Sarkozy on Thursday when the eurozone crisis is expected to dominate discussions. "Beijing wants to be certain that the mechanisms work," Li Daokui of the Chinese central bank's monetary policy committee, told France's Le Figaro newspaper.
The US administration has made it clear in recent weeks that it wants the eurozone to put its house in order urgently. There has been widespread anger in Greece about the austerity measures, such as public sector pay cuts and tax rises, that have been demanded by the eurozone leaders as part of the new bailout agreement.
'Disorderly default'
Mr Papandreou's decision earlier this week to hold a referendum angered other eurozone leaders, who fear their rescue plans for the euro bloc are now unravelling.
There has been widespread anger in Greece about the austerity measures such as public sector pay cuts and tax rises that have been demanded by the eurozone leaders as part of the new bailout agreement.
The fear is that people may vote against the deal, a move that many feel may jeopardise efforts to resolve the debt crisis.
"The concerns about a disorderly default have risen," Donald Hanna of Fortress Investment Group told the BBC."The concerns about a disorderly default have risen," Donald Hanna of Fortress Investment Group told the BBC.
Rising fears about Greece led to further steep falls at the start of trading on European stock markets on Thursday.Rising fears about Greece led to further steep falls at the start of trading on European stock markets on Thursday.
However, by late morning the main indexes in Paris and Frankfurt recovered and were 1.5% higher, while London's FTSE 100 was 0.5% up. However, rising hopes that the Greek referendum would be abandoned had helped the markets to recover by midday trading.
Markets were given a further lift when the European Central Bank decided to cut eurozone interest rates to 1.25% from 1.5%.
The main indexes in Paris and Frankfurt were up more than 3% on the day, while London's FTSE 100 was 1.5% higher.
But there was continuing unease on the bond markets, with Italy and Spain forced to pay higher interest rates in order to borrow billions of euros.But there was continuing unease on the bond markets, with Italy and Spain forced to pay higher interest rates in order to borrow billions of euros.
Stability soughtStability sought
Many economists fear that if Greece exits the euro, it could lead to financial contagion, as investors and ordinary bank depositors in other eurozone countries may fear that their own government will follow suit.Many economists fear that if Greece exits the euro, it could lead to financial contagion, as investors and ordinary bank depositors in other eurozone countries may fear that their own government will follow suit.
"Portugal and Ireland may follow Greece and you could also see a rise in the cost of borrowing for economies such as Italy," said Mr Hanna."Portugal and Ireland may follow Greece and you could also see a rise in the cost of borrowing for economies such as Italy," said Mr Hanna.
Mr Hanna explained that if Greece opted out of the eurozone, it will have to introduce its own currency which may depreciate hugely against the euro.Mr Hanna explained that if Greece opted out of the eurozone, it will have to introduce its own currency which may depreciate hugely against the euro.
Any such move, he warned will see the value of euro debt increase and may result in the bankruptcy of firms exposed to it. Any such move, he warned, would see the value of euro debt increase and may result in the bankruptcy of firms exposed to it.
Mrs Merkel said the eurozone leaders wanted Greece to remain a part of the group, but insisted that the Greek government's decisions were threatening to destabilise the region.Mrs Merkel said the eurozone leaders wanted Greece to remain a part of the group, but insisted that the Greek government's decisions were threatening to destabilise the region.
"The euro as a whole must remain stable," Ms Merkel said. "We would prefer to ensure this with Greece rather than without it. But the top priority is stability.""The euro as a whole must remain stable," Ms Merkel said. "We would prefer to ensure this with Greece rather than without it. But the top priority is stability."
Mr Sarkozy added: "There are rules that form the stability pact. It's up to Greece to decide if they want to continue the adventure with us". Mr Sarkozy added: "There are rules that form the stability pact. It's up to Greece to decide if they want to continue the adventure with us."
Bigger troubleBigger trouble
While the eurozone debt crisis initially started with the smaller economies such as those of Greece and the Irish Republic, the fear is that if not controlled in time, it may affect bigger economies such as Italy and Spain. While the eurozone debt crisis initially started with the smaller economies such as those of Greece and the Irish Republic, the fear is that if not controlled in time, it may affect bigger economies, such as Italy and Spain.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule. Glossary in full		 Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule. Glossary in full
That in turn may hurt growth in the region and derail an already fragile global economic recovery. That, in turn, may hurt growth in the region and derail an already fragile global economic recovery.
Italy, whose debt levels are significantly higher than those of Greece, has hundreds of billions of euros in debts coming due for repayment over the next 12 months.Italy, whose debt levels are significantly higher than those of Greece, has hundreds of billions of euros in debts coming due for repayment over the next 12 months.
However, it is finding it increasingly difficult to borrow money in the international financial markets.However, it is finding it increasingly difficult to borrow money in the international financial markets.
The country's one-year cost of borrowing has risen to 5.1%, its highest since joining the euro, and far above the mere 0.3% interest rate that Germany must pay.The country's one-year cost of borrowing has risen to 5.1%, its highest since joining the euro, and far above the mere 0.3% interest rate that Germany must pay.
The Italian cabinet agreed to new austerity measures demanded by other European governments at an emergency meeting on Wednesday evening, in a bid to reassure them that it was doing its part to cut its debt levels.The Italian cabinet agreed to new austerity measures demanded by other European governments at an emergency meeting on Wednesday evening, in a bid to reassure them that it was doing its part to cut its debt levels.