Greek vote in early Dec, but no loans until then

Updated at 7:18 p.m. ET

CANNES, France - Greece will hold a controversial referendum on a European bailout plan in early December that European leaders said Wednesday will determine whether or not it stays in the eurozone.

Greece won't get any new international loans until then, European leaders said after heaping pressure on Greece's prime minister at emergency talks Wednesday.

"The referendum ... in essence is about nothing else but the question, does Greece want to stay in the eurozone, yes or no?" said German Chancellor Angela Merkel at a press conference.

The statement, echoed by French President Nicolas Sarkozy at her side, was the clearest acknowledgement to date that pulling out of the eurozone is a possible outcome.

Luxembourg Prime Minister Jean-Claude Juncker announced that the referendum would be held Dec. 4, after a meeting with Greek Prime Minister George Papandreou and other European leaders in the French city of Cannes. Sarkozy said the vote would be Dec. 4 or 5.

Sarkozy said the next installment of Greek rescue loans, which had already been approved and were due to be paid in November, cannot be paid until after the referendum.

"We want to continue with the Greeks but there are rules and it's unacceptable that these rules are not followed," Sarkozy said.

The chief of the International Monetary Fund, Christine Lagarde, said "I hope that this whole thing can be closed and completed by mid-December -- I think it's important from a cash point of view."

Papandreou told reporters after his meeting with European leaders Wednesday, "I believe it's crucial that we show the world that we can live up to our obligations."

"This is not a question only of the program, this is a question of whether we want to remain in the eurozone."

Papandreou's stunning announcement Monday that he would stage a referendum roiled world financial markets and threw into question an ambitious and costly European deal worked out in torturous negotiations a week ago.

Merkel confirmed that Greece did not inform the rest of the eurozone about the referendum. "This did not happen in a coordinated fashion," she said.

She and Sarkozy summoned Papandreou to Cannes for talks Wednesday at which European leaders expressed their anger and pressed him to hold the referendum as soon as possible.

A "no" vote in the referendum would have enormous consequences not just for Greece but for the rest of Europe. It could lead to a disorderly Greek default, force Greece out of the 17-nation eurozone, topple many fragile European banks and send the global economy spinning back into recession.

Observers called Papandreou's pledge to let the Greek people themselves vote  a "back me or sack me" move to make sure the Greek public will support the severe austerity measures looming ahead.

But a "no" vote in the referendum would have enormous consequences not just for Greece but for the rest of Europe. It could lead to a disorderly Greek default, force Greece out of the 17-nation eurozone, topple many fragile European banks and send the global economy spinning back into recession.

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With this in mind, French President Nicolas Sarkozy, German Chancellor Angela Merkel and top European Union officials gathered at the Palais des Festivals, site of Cannes' famous film festival, for private talks ahead of their meeting with Papandreou.

Even scheduling the vote could scuttle a pending bailout loan Greece needs shortly to avoid default.

Eurozone finance ministers had already approved their portion of a euro8 billion ($11 billion) aid installment to Greece, but eurozone officials said Wednesday that the payout was conditional on additional austerity measures that Greece committed to as part of the new rescue deal.

"If these (reforms) are now being put in question in December by the referendum then we have a completely different situation," said one eurozone official, who was speaking on condition of anonymity because of the sensitivity of the issue.

The wait is also ramping up the pressure on Italy, the eurozone's third-largest economy, whose debts are enormous but which is considered too big to be bailed out. The yield on Italy's ten-year bonds -- a gauge of market concern -- rose to 6.19 percent Wednesday, uncomfortably close to the levels that prompted Greece, Portugal and Ireland to seek bailouts.

The very fates of some of the G-20 leaders and their own economies could well hinge on how Papandreou's gamble works out. Sarkozy and President Obama both face potentially tough re-election battles within the year.

Sarkozy had hoped the meeting of leaders from the Group of 20 industrial and developing nations, which runs Thursday and Friday, was going to be Europe's opportunity to assure the rest of the world that a comprehensive plan to deal with the European debt crisis had finally been reached after nearly two years of half-measures, indecision and procrastination.

Papandreou's gambit ended that lofty ambition.

Sarkozy and Merkel summoned Papandreou to the meeting, continuing to insist that the euro130 billion ($177 billion) bailout deal for Greece thrashed out last week remains "the only possible way" to sort out Europe's debt problem.

"Germany and the entire international community are striving to deal in solidarity and responsibly with Greece, but there is also a responsibility on Greece's part toward its European partners," Merkel's spokesman, Steffen Seibert, said in Berlin. "Countries in Europe -- particularly the countries in the eurozone -- are so closely integrated that every serious decision in one capital has effects on the other countries."

The Oct. 27 bailout deal would require banks holding Greek government bonds to accept 50 percent losses, while the other eurozone nations and the IMF would provide Greece with about $140 billion more in rescue loans. Greece has been relying on bailout loans since May 2010 to avoid bankruptcy.

Europe reaches deal to save Greece

The head of the global banking lobby that negotiated the debt reduction deal pressured the Greeks to accept the deal.

"It is important for the Greek people to understand that the hardships of the last 18 months are more likely to moderate with the package than in absence of it," said Charles Dallara, managing director of the Institute of International Finance.

Papandreou arrived just hours after winning the support of his Cabinet in a marathon meeting. Some 20 months of harsh austerity have angered most Greeks, with unions staging a seemingly unending wave of strikes and protest marches, many of which have degenerated into riots. The prime minister says he hopes the referendum will lock a disgruntled nation into continuing with its reforms, widely seen as the only way to avoid a Greek bankruptcy.

EU Commission President Jose Manuel Barroso warned that a failure by Greeks to stick to last week's agreement would have unknown consequences.

"Without (the deal)..., the conditions for Greek citizens would become much more painful," Barroso said.

Papandreou will try to convince his European peers the referendum is needed. He said it "will be a clear mandate, and a clear message within and outside of Greece, about our European course and our participation in the euro."

However, some of his governing Socialist lawmakers revolted against the vote, and his government faces a confidence vote Friday with only a two-seat majority in parliament. Irish Finance Minister Michael Noonan said a quick referendum is the only way -- other than early elections -- to limit the damage, a sentiment sure to be echoed by Sarkozy and Merkel.

"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.

Greek Interior Minister Haris Kastanidis said Wednesday that the referendum could be held in December.

Already, the uncertainty surrounding the referendum was causing delays in the euro rescue plan.

The head of Germany's banking association, Michael Kemmer, said a planned bond swap in which banks will take a voluntary 50 percent cut in their Greek debt holdings will have to wait until after any referendum. Kemmer says banks are standing by the deal.

Meanwhile, the European Financial Stability Facility, the eurozone bailout fund that finances large parts of the rescue loans for Ireland and Portugal, on Wednesday had to delay a euro3 billion bond issue for Ireland because of the current "market environment," said spokesman Christof Roche. Roche added the bond issue would go ahead, but not this week.