Two prominent Socialist lawmakers resigned hours before Prime Minister George Papandreou was to reschuffle his Cabinet, a tactic he hoped would help get new taxes and spending cuts approved before Greece was cut off from international lending. The resignations don't affect the government's five-seat majority in parliament, but raise more doubts about Papandreau's handling of Greece's escalating financial crisis.
"The political system is rotting ... The country is not being governed the way it should be," said Socialist deputy Nikos Salagianis. "A reshuffle will not resolve the country's problems."
Trying to quiet the criticism, the Socialists announced emergency talks for Thursday afternoon, which will likely delay Papandreou's announcement of his new cabinet.
Greece's rapidly evolving political crisis comes a day after anti-austerity riots in central Athens and the collapse of negotiations to form a coalition government triggered a sell-off in global financial markets. Investors are deeply worried that a default in Greece could hurt banks elsewhere and set off a financial chain reaction that experts predict would be catastrophic.
Fears that a messy Greek default may be in the offing has sent the euro down nearly four cents over the past couple of days to below $1.41, triggered widespread selling in stock markets and pushed the Greek yield on its ten-year bonds up to a record over 18 percent.
The next week is crucial for Greece. Finance ministers of the 17-nation eurozone are expected to thrash out details of a second Greek bailout to be presented to EU leaders. It's extremely unlikely that another rescue deal will be offered if the Greek Parliament fails to back the new austerity measures.
In Brussels, the European Union's top economic official, Monetary Affairs Commissioner Olli Rehn, said it was "regrettable" that Wednesday's coalition talks failed.
"A great deal of responsibility lies on the shoulders of the Greek authorities and all Greek political leaders. We expect the Greek Parliament to endorse the economic reform program as agreed by the end of June," Rehn said. "The efforts needed to avoid a default - which would be a catastrophe for Greece - are the responsibility of all political forces."
He said eurozone countries will likely agree on Sunday to pay Greece its next rescue loan, saving it from the immediate risk of default, but a decision on a new longer-term bailout will be delayed until July amid disagreement over the role of private investors.
The disbursement of the next installment of Greece's rescue loans, worth euro12 billion ($17 billion), would prevent the country from defaulting on its massive debt next month, but its longer-term financial prospects remain uncertain.
Papandreou has faced withering public criticism over a new five-year austerity package that creditors have demanded in return for continued funding from the euro110 billion ($155 billion) international bailout. Market turmoil reflects waning confidence that Papandreou can win the austerity vote.
Papandreou, scrambling to pass the reforms, has also called a called vote of confidence in parliament, expected as early as Sunday or early next week.
