Cannes: In a day of high drama, Greece and the world moved closer to the brink of a fresh financial crisis before Greek Prime Minister George Papandreou gave in to pressure from France, Germany and from within his own country and scrapped a referendum on a bailout package for the country proposed by the European Union (EU).

Greek Prime Minister George Papandreou. Photo: AP

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The Indian representative to the IMF, Arvind Virmani, talks about the need for a consistent exchange rate policy and what India must do in the face of a global crisis.

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The cancellation of that vote means the bailout package for Greece that was worked out by the EU on 26 October stays. And it lowers the risk of a sovereign default by Greece.

Earlier, on Wednesday, the leaders of France and Germany minced no words and told Papandreou his country would receive no money till the completion of the referendum.

Most European and US markets were trading in the green late on Thursday evening on the back of speculation that Greece would scrap the referendum. They rose further on news of the vote’s cancellation. Most Asian markets closed in the red earlier in the day when it was believed that the vote was very much on. Both the Sensex and the Nifty indices in India closed marginally up.

On Thursday, the focus at Cannes ranged from a structural response—this will entail rebalancing the global economy, from economies with a surplus on the current account to deficit nations—aimed at tiding over the crisis in the euro zone to policy measures to ensure a global recovery. In effect, the meeting became one big firefighting exercise. G-20 leaders discussed a larger role for the International Monetary Fund (IMF) in resolving the European debt crisis.

Meanwhile, the Bric countries (Brazil, Russia, India and China) held talks, but carefully skirted the question of investing in the euro zone bailout facility. Instead, they generically stressed the need for Europe to come up with a package to solve the debt crisis. The countries also agreed to hold the next Bric summit in New Delhi, on 29 March.

Although Europe and the world seemed to have avoided the worst, analysts say challenges remain. Italy, which faces a debt crisis of its own, was expected to come up on the agenda at the G-20 meeting later on Thursday.

The inability of the euro zone to manage the debt crisis could set off a global contagion. And, given that most countries have depleted their firepower in dealing with the last crisis in 2008, they will be hard-pressed to fend off the ill effects.

Arvind Virmani, executive director of IMF, had warned in a recent interview of the impact of just such an event. “If the problem is not sorted out by Europe, let us say, in the next three months, which I am hopeful it will do, then you could have a real bad event; something that will definitely affect all of us—there is no question (of being insulated). All emerging markets like China, India, Brazil, you name it, will be affected."

Analysts said the crisis in Europe exposes the structural flaw of the union that mandates a single currency, but allows sovereign independence over fiscal policy—the root of the debt crisis in some euro zone countries.

That the solution had to be political became clear on Thursday after the European Central Bank’s (ECB) new governor Mario Draghi unexpectedly cut interest rates to help the cause of economies reeling under the effects of the region’s debt crisis, but, at the same time, indicated that the bank has no desire to help debt-ridden euro zone countries threatening the fate of the union. “What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?" Draghi said.

Bloomberg and Reuters contributed to this story.