ATHENS, Greece (AP) — Squeezed between international creditors and an angry public, Greece's beleaguered prime minister faced an escalating revolt within his own Socialist party Thursday as he maneuovered to pass new austerity measures.
Two prominent Socialist lawmakers resigned in parliament hours before Prime Minister George Papandreou was to announce a cabinet reshuffle, a tactic he hoped would help get new taxes and spending cuts approved before Greece was cut off from international lending.
The crisis broke out a day after anti-austerity riots in central Athens and an embarrassing collapse of negotiations to form a coalition government trigered a sell-off in global financial markets. Investors are deeply worried that a default in Greece could hurt banks elsewhere and set off a financial chain reaction that experts predict would be catastrophic.
The next week is crucial for Greece. Finance ministers of the 17-nation eurozone are expected to thrash out details of a second Greek bailout to be presented to EU leaders. It's extremely unlikely that another rescue deal will be offered if the Greek Parliament fails to back the new austerity measures.
Fears that a messy Greek default may be in the offing has sent the euro down nearly four cents over the past couple of days to below $1.41, triggered widespread selling in stock markets around the world and pushed the Greek yield on its ten-year bonds up to a record over 18 percent.
Papandreou is struggling to contain party dissent over a new five-year austerity package that creditors have demanded in return for continued funding from a €110 billion ($155 billion) international bailout. Market turmoil reflects waning confidence that Papandreou can win the austerity vote in the 300-seat Parliament.
Papandreou, scrambling to pass the reforms, has also called a called vote of confidence in parliament, expected as early as Sunday.
The resignations of two lawmakers Thursday do not affect the government's five-seat majority in parliament, as their seats will now go to other Socialists, but it was a clear sign of deepening dissent.
Giorgos Floridis, a former public order minister who fiercely criticized the slow pace of reforms in Greece, had been tipped to join the new government but instead joined the growing ranks of skeptics. In his resignation letter he blasted both the Socialists and opposition parties for brinkmanship tactics.
"Unfortunately, the leaderships of the two main political parties have once again failed to rise to national circumstances, in a politically unforgivable way," Floridis wrote. "Instead of sounding a national alert ... the parties resorted to making their own petty calculations."
Former deputy health minister Ektoras Nasiokas also quit. Earlier this week, Papandreou's majority in Parliament was trimmed to five after another Socialist lawmaker declared himself an independent.
Although Papandreou has not indicated publicly what his new government will look like, the reshuffling is expected to be sweeping. Key figures, including the finance minister, George Papaconstantinou, could be replaced.
Papaconstantinou has drawn the ire of many Greeks for his handling of the crisis and the massively unpopular tax hikes and spending cuts demanded by the European Union and International Monetary Fund in return for the bailout loans.
EU officials have been pressing for cross-party unity on the new austerity package, which will impose more tax hikes and spending cuts, and runs two years beyond the current government's term to 2015. The bill must be passed in Parliament by the end of this month.
But conservative opposition leader Antonis Samaras has insisted the initial agreement for Greece's bailout must be renegotiated.
The ensuing turmoil in the markets has reflected waning confidence that Papandreou can get the new austerity bill through Parliament.
The austerity bill has led to widespread discontent. On Wednesday, a major rally by tens of thousands of protesters in Athens degenerated into riots. Clouds of tear gas wafted across central Athens and lawmakers had to be escorted by armed motorcycle guards past protesters into Parliament.
Pan Pylas contributed from London.