LONDON — The escalating political crisis in Greece sent shockwaves through markets Thursday and fueled a sense of inevitability that the eurozone is about to face its first debt default.
While Greek Prime Minister George Papandreou is preparing to reshuffle his government in an attempt to get austerity measures through Parliament, European policymakers expressed their dismay as they prepare for what could be a crucial meeting of EU leaders in a week's time.
"What we need most today, is unity," said French President Nicolas Sarkozy. "We have to leave the national fights behind us to find our sense of common destiny again."
As events unfolded and uncertainty grew, experts became increasingly convinced that some form of debt default by Greece is now inevitable.
If Papandreou does not get his austerity plan approved, the country won't get its next rescue loans and would have to renege on its debt obligations.
But in order to help Greece, some form of default may also be required. In recent weeks, Europe's top financial authorities have been at loggerheads over how to get private creditors to share the pain, a move experts say could be considered a default.
That could heap massive pressure on the continent's banks, particularly if investors become convinced that other bailout recipients Ireland and Portugal will be next.
A European Central Bank official warned that the EU's crisis bailout fund would have to double to €1.5 trillion ($2.1 trillion) if Greece fails to pays its debts, spreading financial turmoil.
Nout Wellink told Dutch paper Het Financieele Dagblad that "if you fall through the ice you better have a very large safety net."
European officials are talking about more aid to keep Greece from defaulting but the political chaos has thrown everything into question. And the uncertainty has hit sentiment in markets around the world.
"Talk of the bailout fund being doubled in size, a Greek government reshuffle, and Greek PM Papandreou offering to resign, doesn't offer a stable back drop for investors," said Michael Hewson, market analyst at CMC Markets.
Stock markets across Europe fell sharply on Thursday, a day after they suffered big losses as protests in Athens turned violent and Papandreou sought, but ultimately, failed to create a coalition government, even offering up his job in the bargain.
By late-morning London time, the euro was down at $1.4072 — its lowest level since May 26. Thursday's decline means that the single currency has fallen around four cents since Greece's government appeared to be on the verge of collapse Wednesday.
In Paris, Sarkozy urged other European leaders to find a compromise on Greece's debt crisis to stabilize the euro. The Greek crisis will likely be at the forefront of discussions between Sarkozy and German Chancellor Angela Merkel on Friday.
Sarkozy said compromises to "preserve the stability of the eurozone were needed now....Because without stability, no growth is possible," Sarkozy said at a conference of international farmers.
The potential of a Greek debt default to inflict damage on France, Europe's second biggest economy, was evident Wednesday when Moody's warned that three of the country's biggest banks were at risk of a credit downgrade because of their exposure to Greek debt.
Ahead of another round of meetings of eurozone finance ministers and EU leaders next week, there's increasing speculation that a deal that involves the private sector sharing some of the bailout burden will have to be struck if Greece is to avoid default.
That's not proving to be easy, with Germany and the European Central Bank seemingly at loggerheads over the issue.
Another top ECB official, Juergen Stark, said the bank could envision involving bondholders, but stressed that any such step must be completely voluntary.
"We are not against involving the banks, not against involving the private sector in financing Greece, but it must be completely voluntary, otherwise it will have negative consequences for the financial markets and negative consequences possibly for other countries," said Stark, a member of the bank's six-member executive committee.
"It is not just about Greece, but also about the other countries that at the moment are likewise in EU and IMF programs."Comment on this story
Stark said he had sympathy for the viewpoint that taxpayers not be expected to fund all of the bailout efforts, but warned that the concern was the risk such a step would have for triggering serious financial market disruption.
"I have great understanding for this argument, that one demands burdensharing between taxpayers on the one side and the private sector on the other, but once again: it's about far reaching effects that must be kept in view, if one broaches such an idea and then carries it through to a political decision," Stark added.
David McHugh in Frankfurt, Toby Sterling in Amsterdam and Raf Casert in Paris contributed to this story.