NewsBreakingOnline

Greek prime minister fails to form unity government as police battle rioters in Athens and shares tumble over default fears The Greek government was on the brink of collapse after pitched battles on the streets of Athens on Wednesday, sending world stocks tumbling as EU leaders squabbled over whether and how to launch a second attempt to keep Greece from insolvency. George Papandreou, the socialist prime minister, appeared to admit defeat by offering to dissolve his government and form a national unity coalition, but admitted his efforts to negotiate with the opposition conservatives had failed. “Tomorrow I will form a new government, and then I will ask for a vote of confidence,” Papandreou said on state television. The move followed intense but fruitless negotiations with the conservative New Democracy party to engineer a consensus behind the savage public spending cuts deemed necessary and a wholesale privatisation programme. The opposition had called for Papandreou’s resignation and a renegotiation of the bailout terms with the EU, the European Central Bank and the International Monetary Fund as the price for its assent to a national coalition. Earlier, riot police had battled with tens of thousands of protesters in the capital against the radical austerity measures being imposed to try to secure a second bailout in a year, running to tens of billions of euros. EU governments, the ECB, and the European Commission were gridlocked over how to respond to the debt emergency, which pushed Greece closer to sovereign default, possibly triggering a fresh European banking crisis. A sense of siege descended on Brussels as the Greek drama appeared to be heading towards a denouement. The ECB warned that a Greek default could spark “contagion” across Europe, causing Greek banks to implode and inflicting major damage on the big banks in France and Germany. “It looks like a week of chaos,” said a European official in Brussels. Senior diplomats in Brussels said that an emergency meeting of the 17 eurozone finance ministers on Tuesday had failed to bridge the differences over how to construct a second bailout in a year for Greece, running to almost €100bn. In May last year the EU and the IMF put together a €110bn bailout for Greece, the first in a single currency country. That experiment has failed. Ireland and Portugal have since also needed to be rescued from national insolvency. “The euro area faces a very challenging situation that comes mostly from the interconnection of the sovereign debt crisis and the situation of the banking sector,” the ECB said. “Greece could have a contagion effect,” added Vitor Constancio, an ECB vice-president. Papandreou’s offer of a national unity government signalled he was throwing in the towel, spelling the third government collapse in the EU in recent months because of the debt crisis – following Ireland and Portugal. The debt crisis has also taken a heavy political toll in the richer creditor countries of the eurozone, with anti-bailout populists making big gains in Finland and the Netherlands, and German Chancellor Angela Merkel suffering political setbacks at home while coming in for criticism abroad for her handling of the emergency. The Americans are exasperated with the failure of EU powers to resolve the crisis and fear for the impact of a Greek default on the international economy. Greek borrowing costs soared to record levels as investors took fright. Stock markets suffered; the Dow Jones industrial average in Wall Street was down 180 points, and FTSE 100 was down 60 points. Berlin, backed by the Dutch, Austrians, and Finns, have been arguing for weeks that there can be no new bailout of Greece without the country’s private creditors being forced to suffer losses on their loans. Otherwise, they argue, European taxpayers will be shouldering the costs while the international banks pocket the proceeds. The ECB, the European Commission and other EU countries led by France argue that this could pave the way to disaster, with the financial markets decreeing the compulsory “haircuts” on private bondholders a Greek default, a “credit event” that could lay waste to the single currency. “We are against any sort of default with haircuts and any form of private-sector event that could lead to a credit event or a rating event,” Constancio said. There was little sign that the differences had been bridged at Tuesday’s emergency meeting of eurozone finance ministers. They meet again in Luxembourg on Sunday under pressure to strike a deal on a new Greek rescue by June 20, ahead of an EU summit on Thursday next week. But in Brussels diplomats said it could take weeks, perhaps until mid-July, to reach agreement. Amid a mood of heightening panic, all eyes were on a summit on Friday between Merkel and the French president, Nicolas Sarkozy. Greece needs a fresh infusion of cash from the IMF by next month to service its debts, but the IMF cannot disburse the funds unless Greece’s public finances are deemed to be secure. Without a new EU bailout, they are not secure. Greece European debt crisis European Union Financial crisis Germany Euro Ian Traynor Helena Smith guardian.co.uk