Greece to head to polls again after talks collapse

ATHENS, Greece -- Greece headed into a month of political uncertainty after power-sharing talks collapsed Tuesday, triggering new elections that could determine whether the country retains its tenuous position in Europe's currency.

Nine days of fruitless talks to build a coalition government fueled increasing doubt that Greece can make enough reforms to prevent the world's largest currency union from fracturing.

"We expect the euro to remain under pressure as a result of this, and pressure on the borrowing costs, the bond yields, of countries like Spain and Italy to persist," said John Bowler, director of the Economist Intelligence Unit's Country Risk Service.

No date has been set for the elections, but they will have to be held by mid-June -- the month in which Greece must make more spending cuts to ensure it meets the terms of its international bailout. A caretaker government will be appointed until then.

The uncertainty has created alarm across the continent, with key leaders fearing that Greece could be forced out of the euro, triggering shock waves throughout the 17-country eurozone.

What Greece now needs is reliability and the will to reform" German Foreign Minister Guido Westerwelle said in a statement. "They are the only way back to growth and competitiveness. There is no alternative."

"We want Greece to remain part of the eurozone," he said. "The decisions that lie ahead in Athens are not just about the future government of Greece. This is about a commitment by the Greek people to Europe and the euro."

The protracted deadlock and the prospect of an anti-austerity party winning the new vote hammered Europe's markets on fears that Greece might have to leave the euro.

Main European markets lost earlier gains, with the FTSE 100 index of leading shares shedding 0.6 percent, Germany's DAX down 1 percent and the CAC-40 in France 0.7 percent. Greek shares were clobbered further after days of heavy losses, with the Athens stock market initially diving 4.86 percent before a slight rally to close 3.6 percent down. The euro also fell, trading 0.3 percent lower at $1.2794.

About (euro) 700 million ($898 million) in deposits have flown out of Greek banks since the May 6 elections, President Karolos Papoulias told party leaders after being briefed by the central bank governor, George Provopoulos.

"The situation in the banks is very difficult," Papoulias said according to a transcript of the meeting's minutes released by his office. "Mr. Provopoulos told me that of course there is no panic, but there is great fear which could turn into panic."

Socialist party leader and former finance minister Evangelos Venizelos on Tuesday said the country is "unfortunately" headed for another round of elections, "because certain people coldly put their short-term party interests above the national interest."

Papoulias convenes a new meeting of party leaders on Wednesday to appoint a caretaker government until the election.

On May 6, voters furious over the handling of the country's two-year vicious financial crisis took their anger out on the conservative New Democracy and socialist PASOK parties that dominated Greece's political scene for the past 40 years, deserting them for smaller parties on the right and left.

New Democracy came in first but with a massive loss of support. PASOK saw its popularity plunge to the lowest level since it was founded in 1974, after the end of Greece's seven-year dictatorship. Those who saw their numbers surge were parties that promised to pull Greece out of its bailout agreement, with forced spending cuts and tax hikes in return for billions of euros in international rescue loans.

Political leaders traded accusations as to who was to blame during the failed power-sharing talks.

The spotlight quickly fell on Alexis Tsipras, the young head of the Radical Left Coalition, or Syriza, whose party came a surprise second in the elections. Tsipras insisted he could neither join nor support any government that would continue to implement the bailout terms.

Venizelos and conservative New Democracy head Antonis Samaras accused him of being irresponsible, saying his policies would force Greece out of the eurozone.

But Tsipras remained adamant that the austerity measures meant Greece's recession-bound economy could never recover.

"They wanted to leave the country without hope and for us to add our signature to these measures of poverty and desperation," he said. "We will not do them that favor."

Venizelos and Samaras could have formed a government with the small Democratic Left party of Fotis Kouvelis, but all insisted Tsipras had to be on board or at least lend his backing if the government hoped to push through yet more austerity measures Greece must implement next month. A last-ditch proposal by the president for the creation of a technocrat government went nowhere.

"I did what I could. Let all Greeks draw their conclusions, and all parties assume their responsibilities," Kouvelis said.

Opinion polls show Syriza is likeliest to come first in the new vote, but without enough seats in parliament to govern alone. However, as first party, Syriza would enjoy an automatic 50-seat bonus and could hope to form a coalition with the help of other left and right-wing anti-austerity parties.

"These upcoming elections will be a struggle between the left-leaning forces of nihilism in league with opportunistic populists," New Democracy leader Antonis Samaras said. "On the other side will be a European front, strong and determined."

Many Greeks seem resigned to the need for new polls, even though that will hold back the country's commitments to detail new harsh cutbacks.

"The solution is provided by democracy and democratic procedures," said Athens resident Yannis Ekaterinaris.

But others saw no hope of any change, saying a new election won't solve their problems.

Dmitris Mardas, an associate professor of economics at Thessaloniki University, said the timing of the vote would be especially painful in June, key dates for Greece's tourism industry.

"As far as the economy is concerned, this is the worst thing that could have happened," said Mardas. "It's just what we didn't need."

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Associated Press writer Derek Gatopoulos contributed to this report from Athens.