Athens looks set to form a new government

ATHENS is likely to form a new government today following the U-turn by the prime minister when he reversed his shock decision to hold a referendum on his country’s bailout package.

A vote of confidence in the government of Georges Papandreou is expected to go ahead later today in Athens and some believe it could end his premiership.

There was huge relief among EU leaders attending the G20 summit in Cannes when Mr Papandreou made his announcement after massive pressure from the German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Markets responded positively to the change of mind on the referendum which shocked EU leaders and investors on Tuesday and came as a surprise to many in the prime minister’s own Pasok party.

Mr Papandreou’s arch rival within the party — who he made finance minister earlier this year — Evangelos Venizelos, had openly defied him by objecting to the referendum call. He is now a contender to take over the leadership of the socialists.

The prime minister was rapidly losing support in his own party yesterday but he was adamant he was not resigning. Arrangements for some kind of government of national unity or an intermediate government were going on behind the scenes and Mr Papandreou said he had appointed two people to discuss with the opposition getting their support for the bailout deal.

This would avoid the need for an election and allow the parliament to agree to the conditions for the new €130bn loan, and release the €8 billion tranche from the first bailout, which has already been delayed by some weeks.

Leader of the centre right opposition party, Antonis Samaras, went on state television to call for a transitional government to be formed. He warned this was necessary if the country was to continue to receive aid.

Mr Papandreou said calling for a referendum was not an end in itself, but a wake-up call to the parliament and the opposition party, New Democracy to get them on board. Up to now they had opposed the bail-out agreement.

“There is no need for a referendum following the conservative opposition’s change of position and willingness to support the October 26 package”, the prime minister said and added that he would speak to Mr Samaras about the next steps.

EU and Greek specialist, Janis Emmanouilidis, said the effect of Mr Papandreou’s referendum call was like shock treatment. “His move was not smart as it let the genie out of the bottle but it could have a certain positive effect,” he said.

The prime minister and other parliamentarians have been blamed for not wholeheartedly supporting the changes the government signed up to. The lack of progress on reaching targets led the EU/IMF inspectors to leave Athens last month and delay making their quarterly report on the country.

The hope now is that there could be some progress with full parliamentary support, but nobody can say for sure whether the new measures, that include a 50% haircut on investors, will be enough to make Greek’s resulting 120% of debt manageable.

But the most immediate step now for Greece is to secure the €8bn, which the government says is needed to pay almost three-quarters of a million public sector workers and pensions to more than two million citizens, by the end of this month.

Should the parliament make the necessary commitment over the weekend, the decision on releasing the money could be discussed by eurogroup finance ministers due to meet in Brussels on Monday.

However, demonstrations and strikes continued in Athens despite polls suggesting 75% of Greeks want to remain in the euro and 45% agreeing to the austerity measures.