Greece may leave euro, leaders admit

G20 summit on eurozone crisis is dominated by news about Greeks, while IMF is given more cash and fears grow over Italy
Larry Elliott
, Patrick Wintour, and Angelique Chrisafis in Cannes
World leaders at the G20 summit
World leaders at the G20 summit in Cannes, from left, Italian premier Silvio Berlusconi, France’s president Nicolas Sarkozy, German chancellor Angela Merkel and US president Barack Obama. Photograph: Kevin Lamarque/Reuters

    The G20 is planning to increase the crisis-fighting firepower of the International Monetary Fund after the start of its summit was dominated by the first open admission from EU leaders that it might be necessary for Greece to leave the eurozone if the single currency is to survive.
    George Osborne said there was a “real sense of urgency” on a day that saw an emergency interest rate cut from the European Central Bank, backtracking from Greece over a referendum on its bailout conditions, and a recognition that the IMF may need extra resources to cope with a deteriorating global economy.
    Amid distinct echoes of the financial market meltdown in the autumn of 2008, European leaders put massive pressure on the embattled government of Greek prime minister George Papandreou, forcing the abandonment of plans to hold a referendum and triggering a political showdown in Athens.
    Downing Street sources said “strong political pressure to sort itself out” had been put on Greece, while Barack Obama said it was time to “flesh out” Europe‘s bailout plan.

    Share prices rose towards the end of the day as it became clear that Papandreou had been forced to shelve his referendum plans and was seeking to put together a government of national unity that would agree to Europe’s bailout conditions.

    His hold on power looked increasingly tenuous last night after his decision to put the bailout terms to the Greek public was condemned by the finance minister, Evangelos Venizelos, and the opposition said the prime minister’s resignation was a precondition for a national unity government. Papandreou was reported to have later indicated he could step down even if he won today’s knife-edge vote of confidence in parliament.

    “He was told that he must leave calmly in order to save his party,” one source told Reuters on condition of anonymity. “He agreed to step down. It was very civilised, with no acrimony.”

    The summit host, Nicolas Sarkozy, took credit for changing sentiment in Greece, saying “the message addressed to the whole Greek political class by France and Germany” had focused minds. “Things are progressing,” the French president added. “We have said clearly that we want Greece to stay in the euro, but we cannot wish for this if she does not want it herself. We have to defend the currency … we cannot accept the breakup of the euro. That would mean the breakup of Europe.”

    He said the Greek opposition’s decision to support the 27 October bailout package was an important development and “courageous”. Sarkozy said Greece was an independent, free country and in no case could other countries interfere. But he added that his duty was to protect Europe and the euro.

    Dealers said the mood had also improved after the ECB took action to halt Europe’s slide towards recession, cutting its key interest rate from 1.5% to 1.25%. In the summer, the ECB twice raised rates to head off inflationary pressure.

    Mario Draghi, who took over as ECB president only this week, admitted: “What we are observing now is slow growth, heading towards a mild recession by year’s end.” Draghi expressed strong resistance to the ECB being used as a lender of last resort, insisting that it was not its remit.

    The G20 will now seek to shore up confidence both by beefing up the IMF’s finances and by publishing an action plan for global growth that will include a call for Germany, China and Japan to expand their domestic economies and a commitment by Italy – seen as crucial in the fight to hold the euro together – to tackle its public finances.

    Sarkozy piled the pressure on Italy’s prime minister Silvio Berlusconi on Thursday when he questioned whether plans announced in Rome to reduce the country’s budget deficit would ever be implemented. Berlusconi arrived in Cannes with no new proposals for deficit reduction.

    Borrowing costs on Italy’s debts on Thursday rose to their highest level since the euro was founded, after Sarkozy and the German chancellor, Angela Merkel, warned Greece that a no vote in a referendum risked departure from the single currency. At one stage, yields on Italian 10-year bonds rose to 6.4% amid concern that a Greek exit would lead to other struggling countries leaving. News from Athens and the ECB rate cut saw yields slip back to 6.2% in late trading.

    Osborne said it was essential for the plan agreed at last week’s Brussels summit to be implemented, “including in Greece”. It was the responsibility of the eurozone to show that there was an effective firewall. “The eurozone has taken an important decision,” the chancellor said. “The question is whether it is willing to implement those decisions. The message that we are getting here from the eurozone leaders in Cannes is that they are.

    “The international community accepted the need to address the general economic situation. T he debate that has begun is about increasing the resources available to the IMF.”

    As a member of the IMF, Britain will be called upon to increase its own contributions to the fund, but it is not clear how much the UK might have to provide. Ed Balls, the shadow chancellor, said Labour supported the principle of providing extra money to help support the global economy. However, he questioned whether the IMF should solve “a structural problem” in the eurozone.

    “The only way to properly ensure market confidence in the eurozone is for the European Central Bank, alongside the bailout fund, to be given the political support it needs to act as lender of last resort when liquidity problems arise. That is the logic of the monetary union these 17 countries signed up to,” Balls said.

    The fragile sentiment in the markets was illustrated by Barclays chief executive Bob Diamond, who told the BBC it was conceivable that a major European bank could go bust if the crisis got worse: “The question is, can it be managed … without creating systemic risk, which was the big issue around the Lehman Brothers collapse.”

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