Crisis Deepen as Papandreo Speculation Grows

Europe’s financial turmoil deepened, dominating a Group of 20 summit, amid speculation Greek Prime Minister George Papandreou will quit after his call for a referendum on an international rescue split his party and cut off aid.

Papandreou, whose term runs to 2013, will step down today and propose a coalition government headed by former European Central Bank Vice President Lucas Papademos, the BBC reported, without saying how it got the information. The uproar came less than 24 hours after the leaders of Germany and France turned the referendum on a week-old bailout package into a vote on whether Greece stayed in the euro area, cutting off assistance in the meantime.

The hardball tactics of German Chancellor Angela Merkel and French President Nicolas Sarkozy underscored the urgency at the gathering of world leaders to solve the two-year-old debt crisis that is weighing on the global economy. Italy’s bond yields rose to a euro-era record, as the 17-nation currency hurtled into uncharted territory.

“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, France, between one-on-one meetings with Sarkozy and Merkel.

Stocks and the euro gained, reversing early losses, on the prospect that the Greek referendum would be pulled.

“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.

Bailout Plans

Such statements mark the first time euro-area powers have broken with the doctrine that the 12-year-old currency is designed to last forever. As they huddled again 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 countries such as Italy.

They agreed to use leverage to beef the fund’s clout up to 1 trillion euros ($1.4 trillion) and told banks to raise 106 billion euros by the end of June to fortify their capital.

Back in Athens, Papandreou will visit President Karolos Papoulias, state-run NET TV reported today. His tenure, already subject to a parliamentary confidence vote tomorrow, weakened through the morning as Finance Minister Evangelos Venizelos openly broke with his boss over whether the referendum might lead to a euro exit. Papandreou “is history,” Dimitris Lintzeris, a ruling party lawmaker, said on NET TV.

To contact the reporters on this story: Simon Kennedy in Cannes at skennedy4@bloomberg.net; James G. Neuger in Cannes at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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