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Athens - A string of parliamentary resignations on Thursday threatened to thwart Greek Prime Minister George Papandreou's plan to reshuffle his cabinet and pass new austerity measures needed to save Greece from default.
The political turmoil raised uncertainty over the Socialist cabinet's five-year plan for tax hikes, spending cuts and state property selloffs demanded by its bailout lenders, spooking investors who fear the problems could infect global markets.
The reshuffle reflects the unpopularity of the austerity measures and follows the failure of talks over a unity government on Wednesday that drew disappointment from European Union officials who have appealed for Greece's political elite to unite behind the belt-tightening.
Analysts said it was increasingly unclear whether Papandreou would be able to form a new governing team and get the measures approved amid the political chaos, which follows nationwide strikes and violent protests in Athens on Wednesday.
"It will be very hard now to find good people to form a government now. They don't trust (Papandreou) after all the flip-flops he has made," said former finance minister Stefanos Manos. "Who will make privatisations now in all this turmoil?"
Two lawmakers in the ruling party stepped down on Thursday and will be replaced by other party members.
A ruling party deputy said that there was a lack of leadership in the country and that lawmakers were gathering signatures to force a caucus meeting of the parliamentary group later in the day.
"This does nothing to reduce fears that some form of default will eventually take place," Ben May of Capital Economics said after the resignations.
Buying time
World stocks hit a three-month low on Thursday, the euro slumped to a one-month trough and top-rated government bonds rose as concerns intensified over the crisis.
Euro zone sources said the International Monetary Fund was expected to pay its share of Greece's latest aid tranche quickly to buy the EU more time to finalise a package to keep Greece afloat through 2012 and beyond.
But in a reflection of growing international frustration at the lack of political will for reform in Greece, the European Commission warned that Athens must implement its programme of austerity measures to keep receiving aid.
"The government and the political forces in Greece have to take the decisions, assume their responsibilities in order to support this programme," commission spokesman Amadeu Altafaj told a regular news briefing.
A senior IMF official said the Fund was very concerned by the political turmoil but stood ready to help if Athens approves its austerity plan.
If the reshuffle goes ahead, the new governing team will face a confidence vote late on Tuesday, a parliamentary aide told Reuters.
Papandreou may seek to replace his finance minister, George Papaconstantinou, the main architect of hugely unpopular budget cuts demanded by the EU and the IMF as part of Greece's €110bn bailout last year.
Former ECB Vice-President Lucas Papademos is most frequently mentioned as a candidate to replace Papaconstantinou, who Greek media have said may be on his way to the Foreign Ministry.
Papademos's office said he was out of the country on Thursday and not available for comment.
Austerity
Tax rises and spending cuts worth €6.5bn ($9.4bn) are planned this year, doubling already agreed measures that have driven unemployment up to a record 16.2% and extended a deep recession into its third year.
The European Union and International Monetary Fund have demanded the new 5-year austerity plan as a condition of releasing the next tranche of €12bn in aid, which Athens needs to pay back debt that matures in August.
"I can't believe they are doing this (political wrangling), with all the money they are being offered," a European central banker told Reuters on condition of anonymity.
The plan includes new luxury taxes, a crackdown on tax evasion and tax rises on soft drinks, swimming pools, restaurant bills and real estate. The euro zone member's 750 000-strong state workforce would be cut by a fifth. It also aims to raise €50bn by selling off state-owned firms.
On Wednesday, tens of thousands of angry Greeks massed outside parliament to demonstrate their hostility to the draconian economic measures, while rioters hurled petrol bombs at the Finance Ministry and police fired volleys of teargas to break up the crowds.
Some Greek media a failed attempt by Papandreou to create a unity government on Wednesday had sown confusion.
"Papandreou behaved with eccentricity and created a chaos without precedent," the daily Kathimerini said in an editorial.
The political machinations and international haggling over the terms of a second bailout have battered bond markets, and the cost of insuring Greek debt against default soared to yet another record high on Thursday.
Greek opposition leader Antonis Samaras said the only way out of the crisis was early elections, but analysts said that would only happen if the government failed to get a vote of confidence.
"I think that Greek politicians are mature enough and will vote for the mid-term plan," said Gikas Hardouvelis, chief economist at EFG Eurobank. "What they don't have is the maturity to implement the hard austerity measures that it includes."
