Accept bailout or go bankrupt, France and Germany warn Greece

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France and Germany have slapped Greece with an ultimatum, threatening to effectively bankrupt the country unless it agrees to meet the conditions of its bailout and holds the proposed referendum on its status as a euro-zone member as early as possible.

"Does Greece want to remain part of the euro zone or not?" German Chancellor Angela Merkel asked at a joint news conference with French President Nicolas Sarkozy late Wednesday night. "That is the question the Greek people must now answer."

The response by the euro-zone's leaders to Greece's bombshell announcement on Monday that it would hold a popular vote – which will likely take place on Dec. 4 – was the strongest signal yet in the two-year-old European debt crisis of the determination of France and Germany.

It appears they intend to keep the euro zone intact at any cost, even if it means forcing a showdown with Greece and depriving it of much of its financial sovereignty.

On Wednesday in Cannes, a day before the full membership of the G20 begins meetings, Greek Prime Minister George Papandreou arrived for a hastily convened meeting with Mr. Sarkozy and Ms. Merkel. After a haggard-looking Mr. Papandreou left the meeting, the two leaders of the euro zone said Greece's sixth bailout installment, worth €8-billion, would not be paid out unless those conditions are met, and that the loans would certainly not arrive if Greek voters opt to reject membership in the euro zone.

Greece faces an imminent and severe cash shortage and could run short of funding within weeks, unless the International Monetary Fund advances the loans.

"We want Greece to stay in the euro zone," Ms. Merkel said, adding that the €8-billion "can only be disbursed if Greece adopts all of the decisions" of the European summit last week that agreed on the plan to stave off a full-blown credit crisis.

The 27-country European Union, which includes the 17 countries that have shared the euro for more than a decade, had thought last week's EU summit in Brussels had marked the beginning of the end for the debt crisis. At the summit, the EU agreed to expand the bailout fund, known as the European Financial Stability Facility, to €1-trillion; write down Greek sovereign bonds held by banks by 50 per cent; and approve a new bailout for Greece, worth about €130-billion, in exchange for continued deep spending cuts and economic reforms.

A few days later, Mr. Papandreou, whose socialist PASOK party controls just half the seats in parliament and faces a confidence vote on Friday, announced he would put the rescue plan to a popular vote. That turned the agreement made at the EU summit on its head and sent markets plunging as investors took fright at the prospect of Greece shattering the euro zone.

On Wednesday, ING Bank economist Carsten Brzeski called the referendum a potential "Lehman moment," referring to the 2008 collapse of Wall Street investment bank Lehman Brothers, an event that triggered the global financial crisis and plunged much of the developed world into recession.

News of the referendum plan had come as a surprise to the euro-zone leaders and especially angered Mr. Sarkozy and Ms. Merkel. In an effort to bring Greece into line, they have effectively gone for the nuclear option by vowing to withhold loans that Greece requires to pay its bills, from civil servants' salaries to payments on maturing bonds.

In a statement Wednesday night, IMF managing director Christine Lagarde also took a tough line. "As soon as the referendum is completed, and all uncertainty removed, I will make a recommendation to the IMF executive board regarding the sixth tranche of our loan to support Greece's economic program."

Still, Mr. Papandreou vowed to go ahead with the vote late Wednesday night, calling it the "democratic right" of the people. When asked if he thought Greeks would vote "yes" or "no" to continued membership in the euro zone, he said "I want to say we will have a 'yes.' "

In Athens earlier on Wednesday, Mr. Papandreou told his ministers that, "The referendum will be a clear mandate and strong message within and outside Greece on our European course and participation in the euro," according to an e-mailed transcript.

"The dilemma isn't 'this or another government,' " he said. "The dilemma is 'yes or no to the loan accord,' 'yes or no to Europe,' 'yes or no to the euro.' "

Marshall Auerback, senior portfolio manager with Denver hedge fund Madison Street Partners, agreed that the referendum is a legitimate democratic move on an issue that is critical for the country – whether to suffer deep austerity programs in exchange for bailouts, or abandon the euro, revive the drachma and go it alone.

But he wondered whether there was an ulterior motive. "There may be an element of blackmail in it, in the hopes of negotiating better [bailout]terms," he said.

If blackmail were the case, Mr. Papandreou's gambit appeared to have failed.