Greece will form new coalition to stay in euro

PM Papandreou will step down today and new leader must secure an EU bailout package

Under huge pressure from the European Union, Greece last night agreed a new government of national unity to prevent the country from crashing out of the single currency. Greek Prime Minister George Papandreou will step down today when the line up for the new government will be announced.

Greece's EU partners had demanded an end to the political stalemate in Athens in time for today's meeting of European finance ministers in Brussels.

The former vice-president of the European Central Bank, Lucas Papademos, was expected to lead the interim coalition, whose main job will be to secure a proposed EU bailout and ensure Greece's future in the eurozone. As a respected economist, Mr Papademos would restore some of the credibility lost during a chaotic week of political turmoil. However, his role as an adviser to the departing Mr Papandreou could still complicate efforts to have him appointed as interim Prime Minister.

The coalition will include Greece's two main parties and remain in office until the reforms demanded as part of the international rescue package have been fully implemented. The bitter political feuding in Athens, which has deepened the euro crisis, ended late last night as Mr Papandreou met with opposition leader Antonis Samaras in the presence of Greek president Karolos Papoulias.

"It has been decided to assemble a new government with the objective of guiding the country towards elections after the implementation of the October [EU bailout] decisions," read a statement from the president's office.

Those elections are likely to take place in the new year, giving the new government time to pass a complex package of austerity measures in return for €130bn in loans and €100bn of debt relief.

World leaders and international financial markets have watched almost helplessly for the last week as bickering Greek politicians refused to make peace and form a new government. Mr Papandreou, whose disastrous gamble on a euro referendum one week ago sent shockwaves through world markets – clung to power despite losing credibility with EU leaders, as well as public and party support.

Mr Samaras said he would support the EU bailout deal but refused to join a transitional government until Mr Papandreou, whom he has accused of being "dangerous" and a "liar", resigned.

The premier, whose father and grandfather were prime ministers before him, won a narrow vote of confidence on Friday and said he would resign, but squabbling between the two main parties over the timing of elections and his departure created a damaging stalemate. The ruling party, Pasok, wanted to avoid the ballot box for as long as possible as opinion polls suggest they would suffer an historic rout. Conversely, the opposition conservatives are keen for polls to go ahead before they can be tainted by being part of an administration that would have to implement painful and unpopular cuts.

Anger in Greece at the machinations of its political elite has reached fever pitch over the weekend. The conservative daily Ekathimerini headlined yesterday with "Haggling on the deck of the Titanic" while left-leaning To Vima led with "Power Games: Between the Euro and the Drachma".

The vast majority of Greeks want to retain the euro despite two years of failed austerity measures which have not alleviated Greece's debt burden and sunk the country into a deep recession. The bewilderment of the rest of the EU at the stalemate in Athens was summed up by Austria's finance minister Maria Fechter who said Greece's "strange" dynastic politics were to blame for the situation.

"For many years you had two families governing: Karamanlis, Papandreou, Karamanlis, Papandreou," she said. "I wouldn't want to say who is more responsible for the making of this catastrophe."

Gameplan what now?

* European Union finance ministers meet in Brussels today and Greece's representative will have some tough questions to answer. A new government must be appointed for this to take place. Now an emergency coalition has been agreed in Athens, a new cabinet will be announced.

* The final terms of the bailout agreed on 26 October need to be settled so that the package can be put before the Greek parliament. EU leaders have made it clear that the measures will need to be supported by at least 180 of Greece's 300 MPs to signal a broad consensus.

* A date must be set for fresh elections with Greece's two main parties between them languishing at around 50 per cent in opinion polls. Support is growing for smaller parties, including nearly 14 per cent in recent surveys for the communist party.

* By mid-November the next €8bn tranche of EU bailout money will be needed by Athens to pay its bills. If Greece has not satisfied the EU, International Monetary Fund and the European Central bank then the loans will be blocked and the country declared bankrupt.