ATHENS, Greece — Greece faced an escalating political crisis Thursday, with critics in the governing Socialist party in open revolt over harsh austerity measures despite assurances from the European Union that Athens would a receive rescue loan money needed to avoid a summer default.
The party feud was the latest crisis to heighten worldwide concern that danger of a Greek financial collapse could trigger panic elsewhere in the 17-nation eurozone — a fear that saw borrowing costs in vulnerable EU countries surge and stock markets come under pressure.
Greek Prime Minister George Papandreou was forced to delay a planned Cabinet reshuffle and convene an emergency party meeting Thursday after two Socialist deputies resigned and others openly questioned his leadership.
"The political system is rotting ... The country is not being governed the way it should be," said Socialist deputy Nikos Salagianis. "A reshuffle will not resolve the country's problems."
Papandreou is trying to push through a five-year austerity program worth €28 billion ($39.5 billion) that has been demanded by international creditors. The new spending cuts and taxes have spurred violent street protests as well as the party rebellion.
The prime minister failed Wednesday to form a grand coalition with rival conservatives to guarantee that the austerity measures would be passed, despite even offering to quit his job to clinch a deal. He later announced he would form a new Cabinet and put it to a confidence vote in parliament.
Papandreou loyalists insisted the prime minister's leadership was not in question at the emergency meeting.
In Brussels, top EU finance official Olli Rehn said eurozone ministers would likely agree Sunday to give Greece the next €12 billion ($17 billion) installment of loans from the €110 billion ($155 billion) bailout package.
"It means that the funding of the Greek sovereign debt can now be ensured until September," Rehn said, adding that decision for additional rescue funding to cover Greek financing gaps next year are still pending.
"The next days will be critical for the financial stability and economic recovery in Greece and Europe," Rehn warned. "I trust all leaders in Greece and Europe realize their responsibility and will act accordingly."
Markets remain wary of problems in Greece, where borrowing costs touched new records, pushing yields on 10-year Greek bonds to 18.4 percent. Rates on Spanish titles also climbed sharply to 5.6 percent.
Stocks Europe-wide were down sharply for the second day running and the euro hit a three-week low below $1.41, meaning it has fallen around four cents in just a couple of days.
"The Greek crisis is spinning out of control," said Kit Juckes, an analyst at Societe Generale.
Greece still has a massive financial hole to plug in the years to come and is going to need a second bailout. Rehn said discussions over the longer-term bailout will be delayed until July as key European policymakers are at loggerheads over how to get private creditors to share the pain, a move experts say could be considered a default.
The European Central Bank warns that forcing losses on private creditors could pummel banks in Greece and throughout Europe, triggering a financial chain reaction of unknown — yet possibly catastrophic — proportions.
Investors could become convinced, for example, that other bailout recipients like Ireland and Portugal will be next to default, and fear of contagion could make the situation worse.
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, potentially spreading financial turmoil.
Nout Wellink told the Dutch paper Het Financieele Dagblad that "if you fall through the ice you better have a very large safety net."
Gabriele Steinhauser in Brussels, Pan Pylas in London and Elena Becatoros in Athens contributed.