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Greek Government on Brink of Collapse Over Debt Crisis

by David Gow and Helena Smith in Athens

The Greek government stands on the point of collapse, with the country set for a general election over membership of the euro rather than the referendum planned for early December.

A spokesman for Greece's government says it is prepared to discuss an opposition demand for the creation of a transitional government to approve the latest European bailout deal and secure the next installment of rescue loans for the country. (AP Photo/Thanassis Stavrakis) Calls for a national unity government embracing the opposition also intensified as EU political leaders and financial markets demanded an end to the regional uncertainty unleashed by a small country on the periphery of the eurozone and called for measures to prevent a slide into Europe-wide slump.

George Papandreou called an emergency meeting of his cabinet for noon local time (10am GMT) on Thursday after his finance minister broke ranks over the referendum and several socialist deputies quit or threatened to quit his Pasok bloc in parliament.

Papandreou's political survival both as prime minister and head of the Pasok party will be determined by the cabinet meeting. Filing into parliament for the session MPs said they would listen to the leader's assessment of the Cannes meeting before they "made up their minds" as to whether to back the confidence motion.

"The PM has realised that his referendum call has backfired disastrously," one Pasok cadre told the Guardian. "He knows the vote cannot be held and that the overriding question now is when the country holds elections."

At all costs, said aides, Papandreou was keen to avoid a bout of "unnecessary blood-letting" that would further increase the political and economic uncertainty engulfing Greece.

"What we need is calm … not a massacre which has happened before," said Apostalos Kaklamanis, who helped found Pasok out of an anti-resistance movement with Papandreou's father, Andreas, following the collapse in 1974 of military rule.

Another veteran socialist, Telemachos Hytiris, said Papandreou should now assemble a government of national unity with the purpose of ratifying last week's EU/IMF bailout for the country and then call early elections.

"The prime minister should call the other parties to join a coalition government and share the responsibility, to allow the European deal to pass and the next loan tranche to be disbursed," he told reporters. "After that we should smoothly go to elections."

Papandreou faces defeat in parliament on Friday on a confidence vote after his majority sank to just one as deputies loyal to Evangelos Venizelos, the finance minister and would-be premier, abandoned the socialist prime minister.

The political chaos threatens to bring wider contagion in eurozone financial markets, with Italy in the firing line as yields (interest rates) on government bonds reach historic highs and Silvio Berlusconi loses his grip on the reins of power.

EU leaders publicly and privately are putting enormous pressure on Antonis Samaras, leader of Greece's opposition New Democracy party, to drop his populist anti-austerity stance and join a government of national unity.

This was the message from the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, at their stormy talks with Papandreou and Venizelos at the G20 summit in Cannes overnight. Christine Lagarde, the IMF managing director, has directed similar messages at Greek leaders in recent days.

Venizelos took the unprecedented step of issuing an official statement at 4.45am local time on Thursday in Athens after stepping off the plane from Cannes. It said: "Greece's position within the euro area is a historic conquest of the country that cannot be put in doubt. This acquis by the Greek people cannot depend on a referendum."

Venizelos added that the sixth tranche of the original €110bn bailout, worth €8bn and destined to pay government officials' salaries, must be paid "without any distractions or delay". Sarkozy and Merkel refused point blank to pay it because of the turmoil caused by Papandreou's referendum plans.

Papandreou insisted overnight that he had only decided upon a national referendum because of the failure to reach a "wider consensus" on the bailouts and accompanying austerity programmes. He also conceded he was not certain to win tomorrow night's confidence vote, or the plebiscite for that matter.

Amid the political turmoil Jean-Claude Juncker, the eurogroup chairman and veteran Luxembourg premier, raised for the first time the prospect of Greece's exit from the eurozone.

"We cannot permanently ride a rollercoaster on Greece; we have to know where things are going, and the Greeks have to tell us where they would like things to go," he told German ZDF television.

He added: "I am very decidedly of the opinion that everything must be done so that one euro country does not leave the 17 but if that were the wish of the Greeks, and I would find that wrong, we cannot force the Greeks.

"If the Greeks make clear via a referendum that they would feel better outside the eurozone than inside the eurozone, then this is a Greek decision, then our Greek friends have to describe the way by which they want to get out of the eurozone."

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