Greece in turmoil over debt plan, but markets still rise

ATHENS, Greece (AP) - Greece was in turmoil and the world economy in limbo Thursday as a high-stakes game of political brinkmanship in Athens led Prime Minister George Papandreou to abandon his explosive plan to put a European rescue deal to a referendum.

The dramatic developments overshadowed the G20 summit of world leaders in the French resort of Cannes, where President Barack Obama implored European leaders to swiftly work out a eurozone plan to deal with the continent's crisis, which threatens to push the world back into recession.

Papandreou sparked a global crisis this week when he announced plans to put the latest European deal to cut Greece's massive debt - a hard-fought accord that took months of negotiations - to a popular vote. The idea horrified other EU nations, Greece's creditors and financial markets as investors worried over the prospect that Greece could be forced into a disorderly default.

Faced with mounting opposition at home and abroad, Papandreou withdrew the referendum call after the main opposition conservatives indicated they backed the debt deal. With them potentially on board, his finance minister argued, there was no longer a need to put the issue to the Greek people.

Stocks rose sharply in the United States and Europe on news the referendum plan had been scrapped, as well as a surprise move by the European Central Bank to cut interest rates. The Dow Jones industrial average jumped 208 points, or 1.8 percent, to close above 12,000 for only the third time since early August.

But Papandreou's government was still in danger. The prime minister faces a crucial confidence vote in Parliament at midnight Friday, after two days of acrimony that saw many of his own lawmakers and ministers rebel. Many asked for his resignation, furious that his insistence on a referendum had endangered the debt deal and led European leaders to question Greece's treasured participation in the euro, the common currency used by 17 EU nations.

The governing Socialists have a slim two-seat majority in the 300-member legislature, and at least one lawmaker has publicly threatened to vote against the Papandreou government.

In an address to Parliament, Papandreou stressed his only interest was Greece's well-being, and hinted he was willing to eventually step down.

"I don't care about being re-elected. I am interested in saving the country," he said, adding that he was open to the mounting calls for the creation of a transitional government that would secure the debt deal, and make sure Greece receives the next, vital installment of its existing bailout funds. After that, he said, he would be open to holding elections.

"Let everything be discussed - the makeup of the government and anything else. ... I am not glued to my seat," Papandreou said.

"My position is crystal clear: Let talks start immediately to create a formation that is broadly accepted, efficient and able to deal with the national interest in this difficult time for the country."

Once Greece is on an even course, he said, "then, of course, we can head to an election process. But a government resignation would have left the country in the lurch."

An angry Antonis Samaras, the head of the main opposition conservatives, insisted Papandreou had to go and dispelled any impression of unity. He argued he had already agreed to back the vital new deal, and demanded quick elections - within the next six weeks if possible.

"Mr. Papandreou pretends that he didn't understand what I told him," he said. "I called on him to resign."

Papandreou "nearly pulled the universe apart to supposedly persuade me to agree to something that I had already said was unavoidable."

He then led his lawmakers in walking out of the parliamentary debate on the confidence vote - although a party official told The Associated Press they would attend the vote itself on Friday.

Amid the political mayhem, Greece's cost of borrowing ballooned, with the interest demanded by markets to buy Greek 10-year bonds exceeding 31 percent - compared with 2 percent for European powerhouse Germany.

Papandreou's surprise referendum announcement so startled world leaders that French President Nicolas Sarkozy and German Chancellor Angela Merkel, two architects of the debt deal, summoned Papandreou to Cannes for emergency talks Wednesday.

There, they made clear that if any referendum were held, it would determine whether Greece stayed in the eurozone, and said Athens wouldn't get its $11 billion ((euro) 8 billion) installment of last year's $152 billion ((euro) 110 billion) bailout until the dust had settled.

On Thursday, Obama declared his solidarity with Sarkozy and Merkel, telling G20 leaders that resolving the financial crisis was "the most important aspect of our task over the next two days."

But with parts of the rescue undefined, he added: "We're going to have to flesh out more of the details about how the plan will be fully and decisively implemented."

The drama in Greece sent immediate ripples throughout Europe. Premier Silvio Berlusconi's government in Italy was teetering after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout.

"It was a surreal farce today ... worthy of a Monty Python film," said Alexis Tsipras, head of a small left-wing party.

Greece's new debt deal would give the country an extra $179 billion ((euro) 130 billion) in rescue loans from the rest of the eurozone and the International Monetary Fund - on top of the $152 billion it was granted a year ago. It would also see banks forgive Athens 50 percent of the money it still owes them. The goal is to reduce Greece's massive debts to the point where the country is able to handle its finances without constant bailouts.

Polls indicate the Greek public is close to the breaking point after more than 20 months of harsh austerity cuts and tax hikes. Recent opinion surveys show 90 percent oppose Papandreou's policies and just 20 percent support his party.

Underlining that point, 300 people held a peaceful anti-austerity protest in central Athens late Thursday.

The past does not bode well for Papandreou: The two other European governments besides Greece that have received bailouts - Portugal and Ireland - have seen their governments fall during the economic turmoil.