Greek government on brink of collapse

State television and the state ANA news agency said that Papandreou would meet the Greek president after an emergency cabinet session on Thursday, without giving further details.

Papandreou would have to submit his resignation or a request for a unity government to President Karolos Papoulias.

Papandreou’s chief of staff denied the prime minister intended to resign although sources within his PASOK socialist party said some senior lawmakers wanted a Greek former top official at the European Central Bank to head a new government.

“I don’t think the government will last until tonight,” said Costas Panagopoulos, managing director of pollsters ALCO.

Papandreou’s surprise decision to call a referendum on the 130 billion euro bailout to save Greece from bankruptcy and prevent a global financial crisis provoked an uproar at home and across the euro zone.

Rejection of the package, which includes yet more austerity measures for the long suffering Greek electorate, would unravel the euro zone’s plan for tackling its wider debt crisis, and cut off Greece‘s international financial lifeline.

Finance Minister Evangelos Venizelos broke ranks with Papandreou, coming out against holding the referendum after a bruising meeting with the German and French leaders, who made clear that Greece would not receive a cent more in aid until it votes to meet its commitments to the euro zone.

“REFERENDUM IS DEAD”

Chaos over Greece‘s role in the euro zone swept financial markets with early losses in stocks and the euro turning to gains on hopes Athens might ditch its referendum plans.

The Greek stock exchange rose 4 percent on speculation the referendum would be abandoned. World stocks as measured by MSCI were flat after earlier being sharply lower.

In Europe, the FTSEurofirst 300 lost 1 percent initially but later stood close to 1 percent higher. Earlier, Japan‘s Nikkei closed down 2.2 percent.

“The referendum is dead,” Greek ruling party lawmaker Nikos Salayannis said on state radio.

The cabinet was due to hold an emergency session followed by a likely meeting of PASOK lawmakers amid speculation that they will call on him to resign.

However, his chief of staff Regina Vartzeli rejected the idea. “The prime minister has not resigned and does not intend to resign,” she told the website of Proto Thema newspaper.

Nevertheless, plotting was in full swing. A small group of senior PASOK lawmakers are preparing a proposal for a coalition government headed by former European Central Bank Vice President Lucas Papademos, party sources told Reuters.

The group was trying to convince Papandreou to quit and open the way for Papademos, a respected figure in Greece, to head a so-called “unity” government to pull the nation from the brink.

One PASOK lawmaker said she would not support the government in a parliamentary vote of confidence on Friday, cutting its majority for that vote to just one.

PASOK has 152 deputies in the 300-member parliament. Lawmaker Eva Kaili announced she would stay in the party but refused to support the government in the confidence vote expected late on Friday, meaning Papandreou could count at most on the support of 151 deputies.

If the government fell and snap elections were called, the referendum would be canceled. The bailout would have to be approved by the next parliament that emerges from elections.

Some lawmakers are calling for a government of national unity which would have the job of getting the bailout through parliament before calling early elections. But the main opposition New Democracy has repeatedly refused cooperation.

Venizelos, one of the most powerful men in the PASOK government, originally supported Papandreou’s plan. His change of mind came after he and Papandreou attended an emergency summit in Cannes on Wednesday with German Chancellor Angela Merkel and French President Nicolas Sarkozy.

A finance ministry source told Reuters on condition of anonymity that Venizelos believed the vote on the bailout, which was agreed by euro zone leaders only last week, should not be held while immediate funding to keep Greece afloat still had to be secured.

A VERY DIFFICULT MEETING

“Under these conditions a referendum is exactly what the country does not need. He would not have objections if all our pending issues such as the loan installment and the completion of the bailout plan had been sorted out,” the source said after the meeting with Merkel and Sarkozy.

“It was a very difficult meeting,” the source added.

Papandreou’s bombshell announcement on Monday of the referendum and parliamentary vote of confidence pitched Greece into a political as well as an economic crisis.

About 10 PASOK lawmakers have publicly called for a coalition government to approve the EU bailout deal and proceed to new elections. About 15, including five ministers and deputy ministers, have rejected the referendum idea.

PASOK lawmaker Costas Gitonas said the referendum should not take place. “No, by no means,” he told Mega TV. “It’s a madhouse.”

The spectre of a hard Greek default and euro exit hung over a meeting of G20 leaders beginning in Cannes on Thursday.

The French Riviera summit had been meant to focus on reforms of the global monetary system and steps to curb speculative capital flows, but the shock waves from Greece have upended the global talks.

ATHENS (Reuters) – By Dina Kyriakidou and Lefteris Papadimas(Additional reporting by Reuters Athens bureau; Writing by David Stamp; Editing by Mark Heinrich)