Greek PM vows to stay on

Greek Prime Minister George Papandreou vowed to stay on and fight to pull his country out of a crippling debt crisis Thursday, facing down a revolt by opponents within his Socialist Party over new but widely unpopular austerity measures.

Papandreou told an emergency party meeting that he would keep trying to reach a consensus with opposition parties over the financial reforms that creditors have demanded as part of a $153 billion Cdn international bailout.

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

That reshuffling had been expected on Thursday, but was delayed until Friday after Papandreou chaired the seven-hour meeting with Socialist lawmakers to try to ease the crisis.

"We will prevail and we will hold on. We have, as a country, in the past, successfully faced major crises. As hard at this struggle is, we cannot run away from our fight," Papandreou told party lawmakers. "We will fight and we will win, for Greece, its people and the future of the new generations."

The political crisis in Greece escalated despite assurances from the European Union that Athens would receive rescue loan money needed to avoid a summer default.

The internal feuding within the governing party was the latest crisis to heighten worldwide concern that the danger of a Greek financial collapse could trigger panic elsewhere in the 17-nation euro zone.

Some analysts still expect default

That fear has pushed up borrowing costs in other debt-burdened EU countries and put stock markets under pressure.

Even if a second bailout is granted to Greece, many analysts think the road will still end in default, and some even wonder if Greece will stay in the 17-nation eurozone.

"While an additional bailout package may stave off near-term disaster, a major debt restructuring seems inevitable at some point and Greece's future in the currency union is looking ever more doubtful," said Jonathan Loynes, chief international economist at Capital Economics.

Some economists fear that a Greek default would trigger financial chaos like the Sept. 2008 collapse of the U.S. investment bank Lehman Brothers.

"The risk of a 'Lehman moment' for the eurozone is increasing," says Neil MacKinnon, analyst at VTB Capital.

Papandreou was forced to delay a cabinet shuffle he had promised for Thursday and convene the emergency meeting after two Socialist deputies resigned and others openly questioned his leadership.

'The Greek crisis is spinning out of control.' —Kit Juckes, analyst, Societe Generale

"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, $39-billion austerity program 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 prime minister 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.

Likely agree on next payment

In Brussels, top EU finance official Olli Rehn said euro zone ministers would likely agree Sunday to give Greece the next $17-billion instalment of loans from the bailout package.

"It means that the funding of the Greek sovereign debt can now be ensured until September," Rehn said, adding that decisions for additional rescue funding to cover Greek financing gaps next year are still pending.

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

Markets remain wary of problems in Greece, where borrowing costs touched new records, pushing yields on 10-year Greek bonds to 18.4 per cent. Rates on Spanish titles also climbed sharply to 5.6 per cent.

"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 and is going to need a second bailout.

Rehn said discussions over the longer-term bailout will be delayed until July as key European policymakers are at loggerheads over how to get private creditors to share the pain, a move experts say could be considered a default.