Greek vote in early Dec, but no loans until then

Greek Prime Minister George Papandreou speaks to the media Sept. 27, 2011, in Berlin. Getty Images

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.

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