Greece political revolt brews amid debt crisis

Left and right wing demonstrators beat each other at Syntagma square in front of the Greek Parliament in central Athens, during a rally against the new austerity measures, on Wednesday, June 15, 2011.
AP Photo/Dimitri Messinis

ATHENS, Greece - Prime Minister George Papandreou has vowed to stay on and fight to pull his country out of a crippling debt crisis, facing down a revolt in his Socialist party over new but widely unpopular austerity measures.

Papandreou told lawmakers Thursday at an emergency party meeting that he would keep seeking a consensus with opposition parties over the financial reforms that creditors have demanded as part of an international bailout.

Papandreou admitted his government had displayed "mistakes and weaknesses," but promised a new, stronger Cabinet in a reshuffling.

Greece is likely to get enough money from the European Union and the International Monetary Fund to survive through the summer, but political turmoil in Athens and disagreement between eurozone governments fanned market alarm that the country could eventually default on its debts.

While Papandreou was preparing to reshuffle his government to get austerity measures through Parliament, a top EU official indicated that the country will likely get its next financial lifeline next month despite finance ministers' failure to agree on a new aid package.

That discussion has pitted rich countries like Germany and the Netherlands, which want private creditors to share a big part of the burden of helping Greece, against the European Central Bank, which warns that their demands could trigger a partial default, spark panic on financial markets and pummel banks in Greece and across Europe.

Olli Rehn, the EU's monetary affairs commissioner, said eurozone ministers would likely agree at their meeting on Sunday to give Greece the next euro12 billion ($17 billion) it is due from last year's euro110 billion package. However, the aid will only be paid out if Papandreou's government, which faces a vote of confidence within days, can get new budget cuts and privatizations through parliament before the end of the month.

The loan would keep Greece afloat until September and give finance ministers and the ECB until their next get-together in July to resolve their differences, Rehn said.

"The next days will be critical for the financial stability and economic recovery in Greece and Europe," Rehn said. "I trust all leaders in Greece and Europe realize their responsibility and will act accordingly."

The payment of the next aid installment for Greece had so far been closely linked to the provision of further aid measures to keep the country afloat over the coming years. The IMF, which is contributing euro30 billion of the existing euro110 billion aid package, had previously threatened not to pay its part of the next loan tranche if Greece's longer-term solvency is not ensured.

However, on Thursday the IMF said it stands "ready to continue our support for Greece subject to adoption of the economic policy reforms agreed with the Greek authorities," adding that it expects a positive outcome of discussions to provide further financing for the country at the next meeting of eurozone finance ministers.

Uncertainty over Greece's longer-term solvency grew nevertheless, with experts saying that investors will eventually have to accept losing some of the money they are owed.

"The situation on the Greek street is showing how little room to maneuver there is domestically," said Sony Kapoor, managing director of Brussels-based think tank Re-Define. At the same time, eurozone governments appear unwilling to give Greece more time to implement painful cuts and reforms.

"Something has to move," Kapoor said.

The uncertainty hit financial markets for the second day running and the euro hit a three-week low below $1.41, meaning it has fallen around four cents in just a couple of days. The yield on Greek 10-year bonds shot above 18 percent, underlining investors' doubts that they will be repaid in full.

"The Greek crisis is spinning out of control," said Kit Juckes, an analyst at Societe Generale.

Greece still has a massive financial hole to plug in the years to come, requiring tens of billions of euros in additional aid. But credit rating agencies and the ECB have warned that plans to get private creditors to share some of the burden could be considered a default and endanger the recovery of other struggling countries like Portugal and Ireland.

An ECB official warned Thursday that the EU's crisis bailout fund would have to double to euro1.5 trillion ($2.1 trillion) if Greece fails to pays its debts, potentially spreading financial turmoil.

Nout Wellink told Dutch paper Het Financieele Dagblad that "if you fall through the ice you better have a very large safety net."