Athens — Greeks awaited word on Monday on the formation of a unity government under a new leader after Prime Minister George A. Papandreou and his chief rival agreed to create a transitional administration to oversee the country’s debt-relief deal with the European Union and then hold early elections. Mr. Papandreou agreed to resign once the details were completed.
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.
Still, he said, he saw little chance that a unity government could get Greece back on the road to economic, political and social recovery. “I don’t think it will work,” Mr. Papandropoulos said. “It will last three months, then we’ll have elections, and then we’ll have the same problems all over again.”
Greece has rarely had unity governments. A civil war between right and left in the late 1940s left its political culture deeply divided, and it remains so nearly 40 years after the fall of a military dictatorship. But the dire economic situation has pushed Greece into uncharted territory.
In an unusually direct ultimatum to Greece, the European Union commissioner for economic affairs, Olli Rehn, said Sunday that finance ministers from the 17 countries in the union that use the euro were expecting the announcement of a unity government before their meeting in Brussels on Monday. Evangelos Venizelos, the Greek finance minister and a key figure in the Socialist government, is scheduled to attend the meeting.
In his efforts to head off the fall of his government and to maneuver Mr. Samaras into backing the debt deal, Mr. Papandreou proposed last week that the debt deal be put to a popular referendum. After the plan threw financial markets into turmoil and European leaders reacted with fury, Mr. Papandreou withdrew the idea, but won a reversal from Mr. Samaras on the debt deal.
One name being mentioned as a possible leader of the new unity government is Lucas Papademos, a former governor of the Bank of Greece. Mr. Papademos is a former vice president of the European Central Bank who has been teaching at the Kennedy School of Government at Harvard since his retirement in 2010.
After leaving the European Central Bank, he acted as an informal adviser to Mr. Papandreou but turned down an offer to be finance minister last spring, not wanting to lose his above-the-political-fray status in Greece.
That independence, and his credibility in Europe, have made him a leading candidate to head a unity government.
It was during his last year at the European Central Bank that the Greek debt crisis flared and he became well known for supporting a hard-line policy advanced by the bank’s president, Jean-Claude Trichet, that Greece should never default on its debt.
Now, the tables for Mr. Papademos have turned and if he were to head the new government, he would have to support the 50-percent debt reduction proposal that lies at the heart of Greece’s new deal with Europe.
One crucial advantage in Mr. Papademos’s favor is that he is a close friend of the new president of the European Central Bank, Mario Draghi, not just from their time at the central bank, but from their days at the Massachusetts Institute of Technology in the late 1970s when they took classes and socialized together.
The new unity government will have its work cut out for it. Among the items on the seven-point plan Mr. Papandreou presented are completing the legal and financial terms of private sector involvement in the Greek rescue, in which banks holding Greek debt agree to voluntarily forgive much of its face value, to avoid a default.
The government also faces the challenge of securing the release of a new installment of 20 billion euros ($28 billion) in foreign aid that Greece needs by the end of February to stabilize its finances.
And it must approve the austerity measures that Mr. Papandreou’s government accepted in its talks with the “troika” of foreign lenders — the European Commission, the European Central Bank and the International Monetary Fund. The layoffs and other cutbacks of Greece’s public sector are likely to generate more angry street demonstrations.
The new government’s success “will depend on the stance labor unions will take,” said Babis Papadimitriou, a political analyst for the daily newspaper Kathimerini and for Skai television. “This will be, maybe, one of the most interesting developments: what will be the relations between unions and the main parties.”
Landon Thomas Jr. contributed reporting.
This article, "Greek Leaders Reach Deal to Form New Government," originally appeared in The New York Times.