Greek prime minister George Papandreou said today he would stick to the course of reforms and would continue to seek wider consensus among Greece's political parties to pass austerity measures needed to save the state from default.
As the country’s debt crisis sent fresh shockwaves through international markets, Mr Papandreou told the parliament: in Athens he will continue seeking wider consensus. "Our response to the challenges we face is stability and to stay on our course of reforms," he said.
However, it was announced tonight Mr Papandreou has delayed a reshuffle of his cabinet until tomorrow morning. The government spokesman added the new cabinet would be sworn in at 1pm local time.
"Our response to the challenges we face is stability and to stay on our course of reforms," Mr Papandreou told a parliamentary caucus meeting called by critics of his austerity policies.
He said he would continue to seek wider political consensus despite the failure of talks yesterday with the conservative opposition in which he offered to step aside if there was commitment to the reforms.
Reeling from strikes, protests and a string of resignations in his Pasok party, Mr Papandreou planned to reshuffle his cabinet and drive through a draconian programme of spending cuts, tax rises and state asset sell-offs to meet EU-IMF conditions.
But the resignation of two more Pasok politicians today and a call by a group of dissident socialists for a party caucus meeting to challenge Mr Papandreou's efforts to drive his programme through parliament raised doubts about his ability to prevail.
The political drama in Athens, where mass street protests turned violent and efforts to form a national unity government collapsed yesterday, has rocked financial markets already spooked by dithering in Europe over a second bailout for Greece.
The euro hit a record low against the Swiss franc and slid against the dollar and the yen today as investors fled to safe-haven assets on mounting concerns that Greece's problem are far from resolution. There were also some signs of growing tension in inter-bank lending on money markets, as occurred when the Greek debt crisis erupted early last year.
In a statement intended to soothe markets, the European Union's economics and monetary affairs commissioner Olli Rehn, said he expected the EU and the IMF to release a crucial €12 billion loan tranche in early July to keep Athens afloat.
Mr Rehn acknowledged it would take longer to put together a second rescue package for the heavily indebted state, due to differences over how to make private investors share the burden, but he called for decisions by mid-July rather than leaving the issue until September, as EU paymaster Germany is suggesting.
"I am confident that next Sunday, the Eurogroup will be able to decide on the disbursement of the fifth tranche of loans for Greece in early July. And I trust that we will be able to conclude the pending review in agreement with the IMF," he said.
A senior IMF official, Zhu Min, said the fund was deeply concerned by the turmoil in Athens but stood ready to help if the government can win consent for its fiscal package. "We hope the Greek government will have consent . . . and we will be able to conclude our review," he said.
The IMF had made the release of the aid tranche due on June 29th conditional on euro zone states agreeing to meet Greece's funding needs for the next 12 months. But several sources said the global lender had now signalled that a political pledge would be enough.
The cost of insuring Greek debt against default soared to an all-time peak today, and the risk premium on the bonds of several other euro zone sovereigns - including Spain and Italy - rose as investors fled to safe-haven German bunds.
The surprise announcement yesterday by Minister for Finance Michael Noonan that the Government would seek to impose “substantial losses” on senior Anglo and Nationwide bondholders has added to the market turmoil.
Echoing Mr Noonan comments, Tánaiste Eamon Gilmore said today Ireland is in a "much better position" to impose losses on senior bondholders than it was a year ago. However, Mr Gilmore warned Ireland could not act unilaterally in making senior bondholders burden-share.
The European Commission, which has opposed such a move in the past, said it had not received any proposal from Ireland.
Irish short-term bonds fell again today, with the three-year bond yield above 14 per cent and two-year yields edging higher above 12.3 per cent. The benchmark 10-year bond yield was lower at 11.544 per cent.
Trade in European money markets showed growing fear that banks may stop lending to each other because of their exposure to Greece, though tensions were not as severe as during the global credit crisis of 2007-2009, when the market froze up.
Some traders suggested the EU was facing its “Lehman moment”. The collapse of Lehman Brothers in the United States in September 2008 caused credit markets worldwide to freeze as investors fled all but the safest government debt.
Additional reporting by Reuters