Greece’s lenders to cut off help until referendum

European leaders said they would halt further aid to debt-ridden Greece until the country completes a controversial referendum on the international bailout and signaled that preparations are underway for the possibility that Greece will abandon the euro.

In what they described as a “difficult” meeting with Prime Minister George Papandreou, European leaders and officials from the International Monetary Fund laid down a firm line: He was free to proceed with plans for a nationwide vote on whether Greece wants to continue under an international emergency program that has demanded stiff austerity measures. But he would get no other help in the meantime, and if Greek citizens reject the program, they would effectively be rejecting the euro.

It was the most direct acknowledgment yet by top European leaders that a breakup of the euro is not only possible but so tangible they need to begin making preparations.

The European leaders said they would speed implementation of current crisis-fighting plans so they will be ready for any outcome in the Greek vote, now slated for early December.

“We wish to continue building the euro with our Greek friends, but there are certain rules,” French President Nicolas Sarkozy said at a late-evening news conference. “It is up to the Greeks whether they want to continue on this road.”

Appearing at his side, German Chancellor Angela Merkel said that Papandreou’s unexpected decision to put the new crisis plan to a popular vote had caused such a deep “psychological change” that European officials felt it necessary to draw a line and demand a quick resolution to the sudden uncertainty.

Papandreou did not appear with them, but he said after the meeting that he believed that “the Greek people are wise and will make the right decision.” He expressed confidence that the vote will build national unity to take on the economic reforms and other changes needed to continue with an international rescue program and stay with the euro.

His grip on power in doubt, Papandreou came here to plead his case that only with a proven popular mandate could he proceed with the tough austerity and reform measures being asked in return for a new slate of international loans and debt relief.

But his argument fell on impatient ears. European officials have been bartering with Greece for a year and a half over how to stabilize the country’s economy, and during that time conditions throughout the euro region have only worsened. The regional economy is slowing, the credit standing of even presumably solid countries such as France is at risk, and officials said there was no time to think in narrow national terms.

The IMF also said it would not recommend further loans to the country until “the referendum is completed and all uncertainty removed,” its managing director, Christine Lagarde, said in a statement.

The latest bailout plan for Greece includes more than $100 billion in debt relief and perhaps $150 billion in new international loans but is being viewed by some in the country as a recipe for more years of austerity and extensive monitoring by international officials. Papandreou says the vote will put the country clearly on the side of remaining within the euro and allow future economic reforms to proceed without the intense political battles he has had to fight at each turn under the current program.

But the outcome is unpredictable, and Papandreou’s unexpected call for a popular vote has all but taken over a two-day summit of world leaders at this French Riviera resort. The broadly felt fear is that a “no” vote by Greek citizens could prompt the country to default on its international bond payments or pull out of the euro zone — situations European officials and the IMF have risked tens of billions of taxpayer dollars to avoid.

The situation is being watched closely by U.S. officials who for months have pressed European leaders to move more forcefully on their debt and financial crises, only to watch the region’s halting, step-by-step approach allow the problem to worsen and threaten major economies, including Italy’s. The administration is holding bilateral talks with European leaders as part of the summit but has been hesitant to wade too deeply into what has become a complex European political negotiation.

In Athens, the Greek Parliament began a three-day debate on a confidence vote scheduled for late Friday that could topple Papandreou’s government long before the referendum takes place. On Thursday, Greek Finance Minister Evangelos Venizelos, who accompanied Papandreou to the Cannes meetings, broke ranks with the prime minister on the call for referendum. Greece’s position within the euro was a “historic conquest” for the country that “cannot be put in doubt” and “cannot depend on a referendum,” Venizelos said in a statement.

Arriving in Cannes — a resort better known for Riviera glitz and movie-star sightings than economic travail — other European officials urged Greece to fufill its commitments. The consequences otherwise, said European Commission President Jose Manuel Barroso, are “impossible to foresee.”

“I want to make a very urgent and heartfelt appeal for national and political unity in Greece,” Barroso said. Without the current package of international loans and economic restructuring, “the conditions for Greek citizens would become much more painful, in particular for the most vulnerable.”

With Greece at the focal point, the G-20 leaders are also struggling with the worrisome fact that the euro region as a whole appears to be slowing — a potential blow to the world economy. Collectively, the euro region economy is about the same size as that of the United States, and a new recession there would mean slower growth in the United States and China as well.

All of the euro zone increasingly seems caught in a vice between the budget-cutting and other steps needed to bring down high levels of government debt and tepid economic growth that is sapping incomes, causing chronically high unemployment and straining political systems.

Despite a new master plan agreed to last week in Brussels, signs of stress are growing. The interest rate paid by the Italian government to borrow money remains high, and Prime Minister Silvio Berlusconi had his own round of emergency talks Wednesday in Rome as his government struggles to meet demands for a balanced budget.

In another troubling sign, the officials in charge of Europe’s bailout fund delayed a planned bond sale rather than risk an uncertain outcome in markets roiled by Greece’s announcement. The bond auction by the European Financial Stability Facility — the agency expected to back up Italy’s multitrillion-dollar government bond market if necessary — was expected this week to help fund an emergency program for Ireland.

If Greek voters reject the latest bailout, “it is going to be a mess,” said World Bank President Robert Zoellick, a party to the Group of 20’s talks. Before Papandreou’s announcement, Zoellick had hoped the summit would help rebuild confidence in the euro region and world markets. But the latest news, he said, “certainly makes the hill steeper.”

Greece accounts for only about 3 percent of the euro zone’s annual economic output. But the default by even a small country, or its exit from the currency region, could reverberate broadly. Contracts and trade deals would get canceled, losses on Greek bonds would ripple through the banking system and investors would worry that other indebted European nations would follow suit.

Over the past decade, the euro brought Greece palpable benefits, such as easier trade with neighbors. But it also provided cheap lending terms that allowed the country to pile up one of the highest levels of government debt in the world in relation to the size of its economy.

Remaining in the euro zone now denies the country tools that could help fight the current crisis, such as the ability to devalue its own currency to boost its exports and encourage tourism.

Staff writer Michael Birnbaum in Athens contributed to this report.

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