After thousands of protesters clashed with police as Parliament debated the measures in Athens, Papandreou tried and failed to forge a coalition government to ensure the package’s approval. In a late-night speech to the nation, he then said he would reshuffle his cabinet and call for a vote of confidence this weekend, wagering his job in an attempt to strong-arm politicians into passing the hugely unpopular package next week.
The spectacle spooked investors; in the United States, the Dow Jones industrial average fell 1.5 percent, almost 179 points, to 11,897.27. Markets around Europe dropped by a similar amount Wednesday.
The political drama in Greece is playing out against deepening fears that the Mediterranean country poses a broader risk to the economic recovery underway in Europe and the United States. Some experts have compared a Greek default to the collapse of Lehman Brothers in September 2008, suggesting it could touch off a run of bank failures that could ripple across the globe.
The high stakes could yet force the Europeans to continue aiding Greece, and pressure mounted on E.U. leaders to end weeks of infighting over how and whether to continue propping Athens up.
The European Central Bank on Wednesday said that risks associated with high levels of government debt were now Europe’s “most pressing concern” and that the year-long effort to quell the crisis was “fraught with some detrimental shortcomings.” Though European officials have tried to contain the crisis by throwing bailouts to three small, troubled nations — Greece, Ireland and Portugal — investors are worried that far larger, heavily indebted nations such as Spain and Italy could be next. The sheer size of their economies could challenge the ability of the E.U. and IMF to bail them out.
Some rating agencies are now putting the risk of a Greek default as high as 50 percent. The effects could cascade through the global financial system, particularly in Europe, where major banks hold massive portfolios of government bonds from Greece as well as other financially troubled nations in the region. Emphasizing that point, Moody’s Investor Services on Tuesday said it may downgrade the credit rating of several major French banks because of their holdings of Greek government bonds and other investments in the Greek economy.