Papandreou scraps plans to hold a referendum

The fast-moving Greek crisis made the G20 summit in Cannes almost redundant as all eyes turned to Athens where Prime Minister Papandreou facing a revolt from within his own governing Socialist party the Pasok, scrapped plans to hold a referendum.

“The referendum was never an end in itself,” Mr. Papandreou told the Cabinet according to statements released by his office. “We had a dilemma — either true assent or a referendum. I said yesterday, if the assent were there, we would not need a referendum.”

Markets rose steadily as investors realised that the danger of a total Greek default had receded as a result of this decision. The most likely scenario now is that there will be a government of national unity before elections are held.

Mr. Papandreou said he would not quit but would hold talks with the opposition over their calls for a transitional government and early elections. However, he warned against holding elections in the near future — as this would entail a “big risk of bankruptcy”.

Prime Minister Manmohan Singh's bilateral talks with French President Nicolas Sarkozy, scheduled for Thursday morning were scuttled by an emergency meeting on the Euro among leaders of France, Italy and Spain, the German Finance Minister and the heads of the International Monetary Fund, European Central Bank and other EU officials. Officials are trying to fit in Mr. Singh into the French leader's crowded schedule on Friday.

The centre of action moved away from Cannes in southern France where the G20 summit of the world's largest economies is under way, to the Greek capital, where a revolt within the ruling socialist Pasok party placed Mr. Papandreou in a more than delicate position. After several Ministers, notably finance chief Evangelos Venizelos, broke ranks to say they would vote against the proposed referendum on the EU bailout agreement, Mr. Papandreou called on the country's President.

“Greece's position within the euro area cannot be put in doubt. This achievement by the Greek people cannot depend on a referendum”, Finance minister Evangelos Venizelos declared on returning to Athens after being hauled over the coals by French and German leaders in Cannes on Wednesday.

Mr. Venizelos' public opposition to a vote on euro membership brought the divisions at the heart of the Greek government into the open with the Greek crisis intensifying throughout Thursday. With several defections from his party it now seems unlikely that the Prime Minister will win a confidence vote in Parliament on Friday.

The revolt led by Mr. Papandreou's would-be successor was the second bombshell that has derailed the G20 talks here. On Wednesday night, French President Nicolas Sarkozy and German Chancellor Angela Merkel kept the vacillating Greek leader cooling his heels for nearly two hours before giving him a severe dressing down.

“Not a cent more shall you get,” Ms. Merkel reportedly told Mr. Papandreou, unless the EU receives clarity on what Greece really wants. Ms Merkel said the aid tranche could be disbursed only once Greece has met all the conditions and there was a positive outcome of the Greek referendum. Greece has to make €8billion in bond repayments in December, the first of which is due on December 19. The EU portion of the €8billion tranche of European and International Monetary Fund aid has been signed off by euro-zone finance ministers but has not yet been paid.

The EU bailout plan, which includes debt relief for Greece, a recapitalisation of European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), was meant to stem the two-year old crisis.

Mr. Sarkozy met his Chinese counterpart Hu Jintao on Wednesday to convince the world's emerging powers to help boost the firepower of the bloc's bailout fund. Mr. Sarkozy has been pressing the Chinese to contribute to the EFSF but Chinese Vice-Finance Minister Zhu Guan threw a damper on those hopes saying: “There are no concrete plans yet. It is too early to speak about these financial instruments.”

The Chinese President told Mr. Sarkozy that it was up to Europe to solve its debt woes, according to a statement published by China's Ministry of Foreign Affairs.