Greece faced an escalating political crisis Thursday, with critics in the governing Socialist party in open revolt over harsh austerity measures despite assurances from the European Union that Athens would a receive rescue loan money needed to avoid a summer default.
The party feud was the latest crisis to heighten worldwide concern that danger of a Greek financial collapse could trigger panic elsewhere in the 17-nation eurozone – a fear that saw borrowing costs in vulnerable EU countries surge and stock markets come under pressure.
Greek Prime Minister George Papandreou was forced to delay a planned Cabinet reshuffle and convene an emergency party meeting Thursday after two Socialist deputies resigned and others openly questioned his leadership.
“The political system is rotting … The country is not being governed the way it should be,” said Socialist deputy Nikos Salagianis. “A reshuffle will not resolve the country’s problems.”
Papandreou is trying to push through a five-year austerity program worth 28 billion euros ($39.5 billion) that has been demanded by international creditors. The new spending cuts and taxes have spurred violent street protests as well as the party rebellion.
The PM failed Wednesday to form a grand coalition with rival conservatives to guarantee that the austerity measures would be passed, despite even offering to quit his job to clinch a deal. He later announced he would form a new Cabinet and put it to a confidence vote in parliament.
A bad day for equities
Stocks Europe-wide were down sharply for the second day running and the euro hit a three-week low below $1.41, meaning it has fallen around 4 cents in just a couple of days.
“The Greek crisis is spinning out of control,” said Kit Juckes, an analyst at Societe Generale.
Germany’s vice chancellor on Thursday insisted that Greece’s private creditors must share the pain of a new long-term bailout for the debt-laden country. Economy Minister Philipp Roessler said Thursday a new bailout package will require parliamentary approval and can only be considered with a “substantial contribution by private creditors.”
EU officials say discussions over a longer-term bailout for Greece are likely to be delayed until July as policymakers are split over how to get private creditors to share the pain – a move some experts say would be considered a default.
The European Central Bank warns that forcing losses on private creditors could pummel banks in Greece and throughout Europe, triggering a financial chain reaction of unknown – yet possibly catastrophic – proportions.
Investors could become convinced, for example, that other bailout recipients like Ireland and Portugal will be next to default, and fear of contagion could make the situation worse.
A European Central Bank official warned that the EU’s crisis bailout fund would have to double to 1.5 trillion euros ($2.1 trillion) if Greece fails to pays its debts, potentially spreading financial turmoil. Nout Wellink told the Dutch paper Het Financieele Dagblad that “if you fall through the ice you better have a very large safety net.”