George Papandreou finally falls on his sword over bail-out

GEORGE Papandreou will stand down as Greek prime minister and a new unity government will be formed to enact a bail-out agreement, the country’s president announced last night.

An agreement was reached after the socialist leader held crisis talks for an hour with conservative opposition leader Antonis Samaras.

A presidency statement said the two men would meet again today to discuss who would head the coalition government, but that it would not be Mr Papandreou.

The statement said: “There will be new communication between the prime minister and the opposition leader on who will be the leader of the new government.”

The EU had given Greece until tonight, when finance ministers are to meet in Brussels, to explain how it would form a unity government and break the deadlock threatening to push the country closer to bankruptcy.

Mr Papandreou had earlier said he would resign once power-sharing talks on his replacement were concluded, but Mr Samaras insisted the resignation must come first.

The prime minister and Pasok party leader asked president Karolos Papoulias to convene last night’s talks. The president underlined the importance of reaching a deal. He said: “This uncertainty that is torturing the Greek people must end. We must find a solution.”

Mr Papandreou narrowly survived a confidence vote in his government on Friday, mid-way through his four-year term, amid increasing calls from both the opposition and many of his own colleagues that he resign.

The crisis was sparked after Mr Papandreou’s shock announcement last Monday that he wanted to put a new European debt deal aimed at rescuing his country’s economy to a referendum. The plan caused an uproar across Europe, triggering panic in international markets and leading to calls in Greece for Mr Papandreou’s resignation, with politicians saying he had endangered Greece’s bail-out.

Mr Papandreou withdrew the plan last Thursday, after Mr Samaras indicated his party would back the new debt deal, which was agreed after marathon negotiations in Europe 11 days ago.

Mr Papandreou also promised to seek a broad-based coalition. The bailout deal aims to save Greece from bankruptcy and prevent its problems tipping much bigger eurozone economies, such as Italy and Spain, into full-blown crisis.

Telemachos Hitiris, a senior lawmaker in Mr Papanderou’s party, said last night the prime minister had made it clear he would resign once a coalition deal was done. He said: “Papandreou will resign once the new prime minister is selected.”

Any new coalition will have three immediate tasks: pushing the eurozone bail-out through parliament, completing a bond swap which will halve the value of private creditors’ Greek state debt holdings, and passing the 2012 budget.

However, it is likely to govern for only a few months, too short a time to finish carrying out reforms demanded by the European Union and International Monetary Fund (IMF) to make the Greek economy more efficient and competitive.

European economic and monetary affairs commissioner Olli Rehn demanded a new Greek unity government restored confidence, which has been shaken by doubts that Athens would commit itself to the €130 billion (£111bn) bail-out package agreed on 27 October.

This would also see banks write off 50 per cent of Greek debt, worth some €100bn.

Mr Rehn made it clear he wanted progress by the time eurozone finance ministers – including Greek deputy prime minister Evangelos Venizelos – meet tonight.

He said: “We have called for a national unity government and remain persuaded that it is the convincing way of restoring confidence and meeting the commitments. We need a convincing report on this by finance minister Venizelos tomorrow in the Eurogroup.”

Mr Rehn said Greece had breached confidence with its eurozone partners last week and had put itself on a path towards leaving the common currency.

He said: “We do not want that, but we must be prepared for every scenario, including that one, for the sake of safeguardingfinancial stability and saving the euro.”

Mr Venizelos has already received a lecture from German chancellor Angela Merkel and French president Nicolas Sarkozy, who summoned him and Mr Papandreou before a G20 meeting in Cannes last week.

The leaders made clear Greece would not receive one more cent in European aid until it had signed up to the latest bail-out – the second package since Athens had to go cap in hand to the European Union and IMF in May last year.

In return for the bail-out money, Greece has been forced to embark on a punishing program of tax hikes and cuts in pensions and salaries. Greeks have staged strikes and protests, some of them violent, against the austerity measures.

The country is due to run out of money by the middle of next month, when it has big debt repayments to meet.

By then, it needs the sixth instalment of its existing EU/IMF bailout package. The €8bn aid tranche was originally due last month.

Greece has been surviving since May last year on a first €110bn bail-out. But its financial crisis was so severe that a second rescue was needed as the country remained locked out of international bond markets by sky-high interest rates.

The goal is to reduce Greece’s debts to the point where the country is able to handle its finances without relying on constant bail-outs.