(Updates with Greek referendum starting in second paragraph. See EXT4 for debt crisis news. GMEET for G-20 stories.)
Nov. 3 (Bloomberg) -- Europe’s financial turmoil deepened, dominating a Group of 20 summit, as Greece’s government veered toward collapse and Italy came under renewed pressure to prove its credit-worthiness.
Greek Prime Minister George Papandreou clung to power after signaling the abandonment of a referendum on bailout terms that had triggered a suspension of European aid. Italian Prime Minister Silvio Berlusconi was pushed by German Chancellor Angela Merkel to accelerate an austerity drive as his country’s bond yields jumped to a euro-era record.
The hardball tactics toward Europe’s crisis-ridden countries underscored the urgency for world leaders meeting in the French resort of Cannes to solve the two-year-old debt woes weighing on the global economy. The European Central Bank offered relief with an unexpected interest-rate cut as its new president, Mario Draghi, said the euro area was facing a recession.
“The most important aspect of our task over the next two days is to resolve the financial crisis here in Europe,” U.S. President Barack Obama told reporters in Cannes between one-on- one meetings with Sarkozy and Merkel.
On a day of political sparring in Europe’s most indebted state, Papandreou squared off with rebels in his own party over the referendum that European officials insisted would determine whether Greece stays in the euro or quits.
The uproar in Athens broke out early with Finance Minister Evangelos Venizelos splitting with his boss over whether the early December ballot might lead to a euro exit. Papandreou “is history,” Dimitris Lintzeris, a ruling-party lawmaker, said on NET TV as lawmakers debated whether to support his administration in a confidence vote tomorrow.
The Greek leader’s call for a poll on the terms of the rescue package failed to inspire confidence. Greek two-year bond yields climbed above 100 percent for the first time today.
By late afternoon, Papandreou floated the prospect of forming a unity government with opposition leader Antonis Samaras, who had sought to capitalize on voter discontent with two years of austerity and a deepening recession.
Europe and the International Monetary Fund made cross-party support for budget cuts a condition for paying out the next 8 billion euros ($11 billion) of Greek aid, the sixth installment in the 110 billion-euro package awarded at the outbreak of the crisis in May 2010.
No Way Out
Breaking with the doctrine that there is no way out of the euro, Merkel and Sarkozy cornered the Greek leader last night in Cannes on the eve of the G-20 summit and transformed the planned vote into an up-or-down decision on whether Greece would stay in the currency union.
“We would like Greece to remain a member but we’re not saying Greece has to stay a member at all costs,” Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro finance ministers, said today on ZDF German television.
As they huddled again in Cannes this morning, Europe’s chiefs pledged to speed up a plan to boost the power of their 440 billion-euro rescue fund to stop Greece’s travails from spreading to other cash-strapped economies such as Italy.
Leaders agreed a week ago to use leverage to beef the fund’s clout up to 1 trillion euros and told banks to raise 106 billion euros by the end of June to fortify their capital.
Italy, meanwhile, was back in the spotlight with an increase in its 10-year bond yield to 6.3 percent, more than triple Germany’s. The euro area’s third-biggest economy has its second-largest debt burden after Greece and has grown more slowly than the region average in each of the last 10 years.
Arriving in Cannes, Berlusconi and Finance Minister Giulio Tremonti were told by Merkel to press ahead with budget- balancing measures and not drag their feet, a German official said. While his Cabinet in Rome agreed last night to include emergency measures in a bill set for passage by Nov. 15, investors want Berlusconi to go further than the steps proposed so far, including a higher retirement age and more state-asset sales.
As politicians clashed, Europe’s economy and markets received a surprise boost from the ECB as Draghi marked his first week as its president by overseeing a rate cut. The bank reduced its benchmark by 25 basis points to 1.25 percent in a shift forecast by just four of 55 economists surveyed by Bloomberg News.
“What we’re observing now is slow growth heading toward a mild recession,” Draghi said.
The former Bank of Italy governor signaled central bankers have no intention of bailing out profligate nations. While it’s not illegitimate to question Greece’s place in the euro area, the bloc’s founding treaty doesn’t allow for a country leaving and it would be hard to imagine it happening, he said.
Europe’s travails overshadowed the G-20 talks as leaders urged its authorities to get a grip on them for the good of global growth. U.K. Prime Minister David Cameron opened the possibility of boosting the resources of the IMF to allow it to protect the world economy.
“Our partners should be acting significantly more actively and decisively to resolve these problems,” Russian President Dmitry Medvedev said. “If this doesn’t happen, we will be hostage to this situation for a long time to come.”
--With assistance from Flavia Krause-Jackson, Nicholas Comfort, Tony Czuczka, Gregory Viscusi, Zijing Wu, Matthew Campbell, Sandrine Rastello, Rebecca Christie and Helene Fouquet in Cannes and Maria Petrakis in Athens. Editors: Alan Crawford, James Hertling
To contact the reporters on this story: Simon Kennedy in Cannes at firstname.lastname@example.org; James G. Neuger in Cannes at email@example.com
To contact the editor responsible for this story: James Hertling at firstname.lastname@example.org