Europe scrambles to deflect panic after shock Greek move

(BRUSSELS) - Europe's big two, France and Germany, called emergency talks Tuesday as angry EU leaders scrambled to ward off financial mayhem in the wake of the Greek prime minister's shock referendum call.

President Nicolas Sarkozy and Chancellor Angela Merkel will hold talks Wednesday "with the European institutions and the IMF as well as a meeting with the Greek side," a Franco-German statement said.

In a brief phone call to Merkel, Greece's Prime Minister George Papandreou told the chancellor that the referendum would "strengthen the country in the eurozone and globally."

But as Papandreou's call for a referendum on a euro debt rescue package agreed only five days ago sent markets into a dizzying tailspin, European leaders appeared shocked and angered.

"There is no doubt the Greek decision ... is having a negative effect on the markets. This is an unexpected decision that generates uncertainties," Italian Prime Minister Silvio Berlusconi said.

The Greek announcement sent Italy's stock market closing down 6.80 percent and its borrowing rates shooting up to record levels.

"Markets need stability and security," Belgium's Prime Minister Yves Leterme said. "The decisions taken at last Wednesday's European summit were destined to restore confidence."

"The Greeks have a right to a prospect of a better future, but they must also be aware that this is no longer a purely internal Greek problem."

Like other European leaders in shock at the move, Leterme admitted surprise. "Papandreou never mentioned it before, during or after the summit."

As World Bank president Robert Zoellick warned a "No" vote on Greek budget cuts could cause "a mess", eurogroup chief, Luxembourg Prime Minister Jean-Claude Juncker, said the result of a failed referendum could trigger bankruptcy for Athens.

"I cannot exclude" bankruptcy, Juncker said. "It will depend on the manner in which the question will be exactly formulated and on what the Greeks exactly vote on."

In Washington, President Barack Obama's spokesman Jay Carney said the referendum announcement "just reinforces the notion that... the Europeans... need to elaborate further and implement rapidly the decisions they made last week."

"It remains the case that the Europeans have the capacity to deal with this crisis, and they need to implement the very important decisions they made last week to provide a conclusive resolution to it," Carney said.

Last week's summit, a marathon affair capping days of talks, was precisely intended to rescue Greece, thereby bringing the entire 17-nation euro area back from the brink.

Amid fears of global recession and strong international pressure, Europe's leaders agreed a package deal that included beefing up its rescue fund to a trillion dollars, strengthening banks and forcing the private sector to write off 50 percent of Greek debt under a pain-sharing scheme.

Greece was offered a total 230 billion euros in a bid to reduce its debt to 120 percent of GDP by 2020 -- but on condition of implementing pledged reforms.

In their statement, France and Germany said they were "determined to ensure with their European partners the full implementation, as quickly as possible, of decisions taken by the summit, which today are more necessary than ever."

"France and Germany would like, in consultation with their European partners and the IMF, for a roadmap to be drawn up quickly to ensure the deal's application," it added.

Hours later Sarkozy, who said the Greek referendum announcement "surprised all of Europe," reaffirmed after an inter-ministerial meeting that the EU deal was the "sole possible way" to resolve Greece's debt problems.

In Brussels, European Union president Herman Van Rompuy and European Commission chief Jose Manuel Barroso rushed to reassure markets the eurozone deal would go ahead after contacting Papandreou by telephone.

"We fully trust that Greece will honour the commitments undertaken in relation to the euro area and the international community," they said in a joint statement.

Of the deal reached at the summit last Thursday, they said "we are convinced that this agreement is the best for Greece."

Spain's government spokesman Jose Blance said the referendum decision was "not a good decision for Europe and not a good decision for Spain either."

George Osborne, finance minister of non-eurozone member Britain, said there was "no doubt" the announcement had added to instability.

"Now ultimately it's up to the Greek people and the Greek political system to decide how they make their decisions, but I would say it is extremely important for the eurozone to implement the package that they agreed last week," he said.