Greek Leaders Reach Deal to Form a New Government

The agreement on Sunday appeared to break a political deadlock that had paralyzed Greece in the face of an acute financial crisis that threatened to infect other euro-zone nations, especially Italy. European leaders see the debt-relief deal struck with Greece on Oct. 26 as crucial to containing the crisis in Greece and insulating Italy, a much larger economy whose political leaders have also struggled to cut budgets and deal with heavy debt.

Yields on Italian bonds — the price Italy must pay to borrow money on international markets — rose on Monday to over 6.6 percent, the highest since the introduction of the euro more than a decade ago, news reports said.

But in a statement reported by the ANSA news agency, Mr. Berlusconi said talk of his resignation before a crucial parliamentary vote on Tuesday was “without foundation.”

The agreement in Greece could not have come soon enough for its European partners, who have pressed the country hard to forge a broader political consensus behind the debt deal. But it was not clear whether the agreement would provide the certainty that skeptical investors are demanding to calm turbulent financial markets.

The debt deal requires that the Greek Parliament pass a new round of deeply unpopular austerity measures, including layoffs of government workers, in a climate of growing social unrest. It also calls for permanent foreign monitoring in Greece to ensure that it makes good on its pledges of structural changes to revitalize its economy, a requirement that many Greeks see as an affront to national sovereignty.

With a narrow and eroding majority in Parliament, Mr. Papandreou’s Socialist government found that it could not unify to push through such measures on its own, but Antonis Samaras, the leader of the conservative New Democracy party, opposed many of the debt deal’s provisions and demanded Mr. Papandreou’s resignation and a snap election. After days of frantic political wrangling, Mr. Papandreou survived a confidence vote in Parliament on Friday, setting the stage for Sunday’s compromise.

The new unity government, in which the major parties would share power, is widely expected to be led by a nonpolitician and to govern for several months, long enough to carry out the debt deal and pass a budget for 2011. The name of the new prime minister and the composition of the new cabinet were not expected to be announced until Monday, when the leaders will meet again, according to a statement Sunday night by the Greek president, Karolos Papoulias, who moderated the talks on Sunday.

In a statement early Monday morning, the Greek Finance Ministry said that delegations from the Socialist Party and New Democracy met on Sunday “to discuss the time frame of the actions” to implement the debt deal, and added that the two parties regarded Feb. 19 as “the most appropriate date for elections.”

In reaching the agreement, Mr. Papandreou agreed to meet Mr. Samaras’s demand that he step down as prime minister, while Mr. Samaras agreed to back the debt deal and a seven-point plan of priorities proposed by Mr. Papandreou that would essentially commit the new government to the terms of the debt deal.

Mr. Samaras is not expected to play a role in the unity government, but would be New Democracy’s candidate for prime minister in the general election.

In many ways, a new interim government for Greece buys time for European leaders to put together a stronger bailout mechanism that would protect larger economies from the risk of default, chief among them Italy. High debt, low growth and Mr. Berlusconi’s diminishing credibility have made that nation increasingly vulnerable.

“The decision is very positive, because it will appease the markets and because it shows that Greek authorities are doing what foreign leaders want them to do — to get on with implementing the conditions for the E.U. debt deal,” said Athanassios Papandropoulos, an economist and commentator for the conservative Greek newspaper Estia.

Landon Thomas Jr. contributed reporting.

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