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Greek debt crisis overshadows G20 summit as Obama arrives

CANNES, France — President Barack Obama and world leaders begin two days of pivotal meetings here Thursday, their gathering overshadowed by an unfolding Greek drama.

Hours before Obama boarded a flight to Cannes for the G20 meeting of leaders from the globe's top 20 economies, French President Nicolas Sarkozy and German Chancellor Angela Merkel held a tense meeting Wednesday night with Greek Prime Minister George Papandreou.

Papandreou stunned European Union leaders and financial markets with Monday's surprise announcement that Greece would hold a referendum on an EU bailout deal, which was announced to great fanfare last week after marathon negotiations to prevent a disorderly default on Greek debt that could spark global financial panic.

In a news conference late Wednesday, the two leaders said they told Papandreou that there would be no further European Union aid to Greece until after the referendum, and that the vote by Greeks is expected to happen by Dec. 4 or 5. That freezes a planned $11 billion aid payment. If Greeks vote no, Greece would be declared bankrupt by EU member states and probably lose the right to use the euro, Europe's common currency. If they vote yes, they retain their EU membership but must accept a fiscal austerity plan that will squeeze their economy and lifestyles for years.

"It poses the basic question: Does Greece wish to remain in the Eurozone? Yes or no?" Merkel said. "We wish to remain with Greece, but a stable euro is the main objective."

Asked if Germany and France were exercising "brutal" leadership in pressing Greece, an angry Sarkozy shot back, "You think we're doing this for pleasure? We have enough responsibilities in our own economies!"

The head of the trade group for large global banks holding Greek debt voiced sympathy with the desire to have Greeks vote on their rescue package.

"It's clear that many in Greece feel like they haven't been in control over their own fate," Charles Dallara, head of the Institute of International Finance, told reporters Wednesday.

Greeks have a "historic opportunity," he said, suggesting the deal is the least-bad option since banks will restructure debt equal to about 45 percent of the Greek economy. "It means that the path of adjustment that lies ahead will be less austere and less onerous," he said.

The Greek drama will surely dominate the G20 meeting between Obama, EU leaders and other heads of state gathering in this picturesque French Mediterranean city for their summit, which last week had been expected to feel like a victory lap in celebration of the EU's apparent resolution of the Greek debt crisis, which has shadowed global finance for 18 months.

Obama was set to arrive in Cannes early Thursday morning for his fifth and arguably toughest G20 summit as he and European leaders struggle anew to develop a fix for the cratering Greek economy and prevent financial panic stemming from it from spilling over its borders and across the Atlantic.

His first appointments after landing will be face-to-face separate meetings with host Sarkozy and Merkel, followed by a lunch with G20 leaders and working sessions.

"This is really crunch time, the stakes could not be higher," said Heather Conley, director of the Europe program at the Center for Strategic and International Studies, a foreign policy think tank in Washington.

The European debt deal — which also involved a muscled-up EU bailout fund and requires European banks to boost their reserves to guard against deeper downturns — "may have just been unwound" by Papandreou's move, she said.

Papandreou faces a critical confidence vote Friday in the Greek parliament, the outcome of which seemed unclear late Wednesday.

Not everyone disagrees with Papandreou's move to get public support for an unpopular debt deal. Kemal Dervis, the former finance minister for Greece's neighbor Turkey, told McClatchy that Papandreou and the austerity measures required under the EU deal will have greater legitimacy if voters approve it.

"We have to face up to the fact that as we live in democratic societies, citizens will have to have their say," said Dervis, now a professor at Columbia University in New York and a research fellow at the Brookings Institution, a center-left think tank in Washington. "In a sense, it reflects the needs of a democracy, but those needs collide with the immediacy of markets. Markets can't wait two or three months" for the results of a referendum.

In 2001, Turkey faced many of the same problems as Greece. It was forced to impose severe austerity measures and partially nationalize its banking system. Dervis helped lead the large developing nation back from the brink, but he said Greece faces a tougher road.

"We did everything very quickly. It happened in the first six months after the crisis," Dervis said, in contrast to the months of delay in the EU bureaucracy.

Greece won't be this week's only G20 agenda item. Last week's EU summit left details to be worked out in the debt-relief deal, including where the money will come from for the strengthened bailout fund, the European Financial Stability Facility.

With the U.S. and EU economies hobbled by slow growth and mounting debts, European leaders are looking to emerging nations led by Brazil and China to help seed the $1.4 trillion rescue fund. In that context, White House spokesman Jay Carney rejected suggestions Wednesday that U.S. global influence is waning, dismissing as a "sideshow" China's participation.

"The focus here is a European problem that requires a European solution for which the Europeans have the resources and capacity necessary," he said.

The stakes are high this week for Obama, whose re-election odds next year will hinge largely on the U.S. economy. Obama has cited the European debt crisis while campaigning for his $447 billion jobs package, arguing that Europe's debacle is one of the "headwinds" that has weighed against U.S. economic recovery.

Obama continued pressing for his jobs package Wednesday before departing for Cannes, delivering remarks in front of an aging bridge in the nation's capital and urging Congress to pass his $60 billion infrastructure-investment program.

The G20 meeting comes amid a sea of global protests aimed at financial institutions. Protesters took to the streets of nearby Nice on Tuesday, urging G20 leaders to improve the lot of the world's poor.

Activists from Oxfam International stripped down to green Robin Hood-style hats to push for a tax on international financial transactions that could be used for aid to poorer nations. The U.S. financial sector vehemently opposes this tax, but the Obama administration said as recently as this week that it remains open to such a tax if it applied the same everywhere.

Oxfam and other activists complained Wednesday that humanitarian aid from rich nations is expected to fall by at least $9.5 billion by the end of 2012 — the biggest drop in 15 years.

Summit host Sarkozy has pushed the financial transaction tax, as has Rowan Williams, the Archbishop of Canterbury, who in a column in Wednesday's Financial Times called on the United Kingdom government to embrace such a tax.

At the White House on Monday, Lael Brainard, the undersecretary of treasury for international affairs, told reporters that the administration was "very much in sync with Europe on their goal of ensuring both that large financial institutions bear their fair share of the burden, but also that they're discouraged from taking the kind of risky behavior that led to the crisis."

(Clark reported from Cannes, Hall from Washington.)


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