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Greece agrees on unity government; Prime Minister Papandreou will resign

Michael Birnbaum

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ATHENS — Greece’s two main political parties reached an agreement late Sunday to form a unity government, giving Europe a steadier partner as it works to avert a larger financial crisis on the continent.

Prime Minister George Papandreou will resign after the new government is formed, officials said, although the timing, and who will be his successor, remained unclear.

The move brings Greece a step closer to stability after a political crisis last week threatened its future in the euro zone and raised the prospect that debt crises in other, larger countries could soon follow. The economies of Spain and Italy have been sputtering in recent weeks, and world leaders fear that if Greece failed to sign on to a bailout plan that was worked out late last month, it would trigger a bank run and market panic.

Papandreou and the head of the main opposition New Democracy party, Antonis Samaras, met late Sunday and agreed to form a coalition government that is expected to push through the bailout plan, with Papandreou pledging to step down, the office of the Greek president said Sunday. Talks will continue Monday as the two men decide on a new prime minister and cabinet, according to a statement released by the president’s office.

“I am not interested in staying on in this new government as prime minister,” Papandreou said at a cabinet meeting earlier Sunday, according to a transcript released by his office. “I couldn’t have been clearer. I don’t play games, and neither do I gamble the country’s fortunes.”

Greek politicians were under tremendous pressure to form a unity government before key European meetings Monday at which the country is supposed to start planning its fiscal future. European Union officials lashed out at the squabbling parties Sunday, urging them to end their deadlock. After they told Greece last week that its future in the euro zone was at stake, their words carry new weight in the country.

The agreement seemed likely to bring some measure of reassurance Monday to financial markets. But Asian stocks fell ahead of Sunday’s meeting of Greek leaders, with Japan’s Nikkei 225-stock average dropping 0.3 percent, South Korea’s Kospi Index sliding 0.1 percent and Australia’s S&P/ASX 200 losing 0.3 percent. Markets had a wild ride last week as the Greek turmoil unfolded; borrowing costs in Spain and Italy spiked after the Oct. 27 bailout agreement was announced, and they rose again last week after Papandreou called for a referendum on the plan.

The composition of the next government remained unclear, although Lucas Papademos, an academic who was once vice president of the European Central Bank, has been mentioned in Greek media in recent days as a possible successor until elections are held Feb. 19. Greece’s finance minister, Evangelos Venizelos, made moves last week to challenge Papandreou’s authority in the Socialist party, although he may be too political a choice to lead the country, analysts said. The Finance Ministry said early Monday that the parties had picked Feb. 19 as the election date.

View Photo Gallery — Worst-case scenarios: What would happen if Greece, Spain or Italy were to default? Deutsche Bank, RBS and other investment research firms have released reports detailing the domino effect of a collapse of a single country in the euro zone. Here’s the doomsday scenario.

Nov. 6, 2011