Greek leaders agree on interim government

Coalition forms to help secure country's vital debt bailout as pressure mounts on the Italian premier to step down over economic woes.

ATHENS // Greece's outgoing prime minister said yesterday an agreement had been reached on an interim government that would secure the country's new debt deal.

George Papandreo has been under mounting pressure to strike a deal with the opposition to name a successor. Italy's Silvio Berlusconi has also pledged to step down.

Speaking in a live televised address before a meeting with Greece's president, where he was expected to formally resign, Mr Papandreou wished the next prime minister well but gave no indication of who it would be. "If we didn't have national consensus with this major crisis, when would we have it? We did not have this consensus. Now we do," he said.

His statement came after three days of intense power-sharing negotiations between his Socialists and the opposition conservatives, led by Antonis Samaras.

"Despite our political and social differences, we are setting aside the sterile conflicts. A government of political forces is taking over that goes beyond parties and personal biases," Mr Papandreou said.

"We will take the necessary steps together with national unity to secure implementation of [European debt deal] decisions which offer our country security in particularly troubled times."

There has been intense speculation as to who would take over from Mr Papandreou but he did not say who it would be.

"It was clear that to achieve this effort we would have to agree on a person who would unite us and would be supported by all of us," he said. "The choice we have made is in line with the institutions and will boost the democratic institutions."

The former European Central Bank vice-president, Lucas Papademos, had been tipped to become the interim prime minister.

Mr Papandreou's ministers offered their resignations on Tuesday as part of the process of creating the new government, expected to last only until February when early elections are due to be held.

The new government would be tasked to secure the country's new €130 billion (Dh650bn) European rescue package and then get it through parliament.

That approval would allow the release of an €8bn loan instalment from its existing bailout.

Without those funds, Greece would go bankrupt before Christmas, potentially wrecking Europe's banking system and sending the global economy back into recession.The political crisis erupted last week, when Mr Papandreou said he would put the new European rescue package to a referendum.

Other eurozone nations were horrified by the delay, markets around the world tanked and Greece's international creditors froze payment of the next bailout instalment.

On Monday, eurozone finance ministers said the heads of Greece's two main parties had to commit in writing to the terms of the country's bailouts before Athens could receive the next instalment.

Government officials in Greece said the written agreement required the signatures of Mr Papandreou, the New Democracy leader, Mr Samaras, the Bank of Greece's governor, the new coalition prime minister and the new finance minister - a demand that has prompted an angry response from Greece's conservatives.

Greece has survived since May 2010 on a €110bn bailout package from its eurozone partners and the International Monetary Fund.

The second rescue package involves private bondholders agreeing to cancel 50 per cent of their Greek debt.

As Greece struggled to put its house in order, financial markets pounded Italy yesterday, sending a clear message they want the prime minister, Mr Berlusconi, out immediately. He has pledged to resign after parliament passes the financial reforms that European officials have demanded for months. But the process could take up to two weeks.

"Berlusconi is the supreme political manoeuverer. And no one will believe he has resigned until, yes, he has done so. Simple as that," said Jan Randolph, the head of sovereign risk analysis at IHS Global Insight.

"He survived confidence votes before and he has made comebacks. No one really believes he is gone until he is gone."

No one was suggesting Italy was headed for an immediate bailout.

But the markets were whipping up a catastrophic scenario, something analysts said was the only thing that could make Mr Berlusconi budge.

"With a catastrophic scenario - and it seems we are facing now a catastrophic scenario - maybe Berlusconi can be pushed to support a new government. Or maybe his party will crumble," said Roberto D'Alimonte, a political analyst at Rome's LUISS University.