Greece crisis reaches boiling point as Athens asks if it can stay in the euro

Ian Traynor in Brussels guardian.co.uk, Friday 10 February 2012 19.31 GMT

• Finance minister says Greece must decide by Sunday
• Street violence returns as ministers call bailout terms 'extortion'
• Merkel warns of default's 'uncontrollable consequences'

Riot police detain protesters in Athens after demonstrations against EU bailout terms. Photograph: Yiorgos Karahalis/Reuters

Greece is facing an acute political and social crisis this weekend as the bankrupt state prepares to decide whether it can stay in the single currency.

As riot police clashed with protesters on the streets of Athens, and five ministers resigned in protest at the scale of the spending cuts demanded in return for a new €130bn (£108bn) bailout, Evangelos Venizelos, the Greek finance minister and socialist leader, said the country had until Sunday to choose whether to swallow the eurozone medicine of more cuts – or default on its debt next month and be forced out of the euro.

In an emotional speech he said: "The choice we face is one of sacrifice or even greater sacrifice – on a scale that cannot be compared. Our country, our homeland, our society has to think and make a definitive, strategic decision. If we see the salvation and future of the country in the euro area, in Europe, we have to do whatever we have to do to get the programme approved."

Police ringed the Greek parliament building following the failure of eurozone finance ministers to approve the new bailout for Greece. Prime minister Lucas Papademos had offered new austerity measures worth €3.3bn to secure the euro lifeline, but he was told the cash would not be forthcoming until savings of an additional €325m were identified. He was told to get the €3.3bn programme endorsed and come up with a plan for the new cuts – to plug a gap in this year's budget – by Sunday.

George Karatzaferis, a Greek coalition leader, spoke of national humiliation and said he would not accept the new cuts, adding that Greece was labouring "under the German boot".

The scenes of violence in Athens shattered the mood of calm that has characterised the financial markets this year. The French and German stock markets closed down around 1.5%.

The anger from the extreme right in Greece was echoed on the left where a resigning socialist minister accused the eurozone of "extortion" in its policies towards Athens.

In Germany, Angela Merkel was reported to have warned her centre-right MPs of "uncontrollable consequences" for the eurozone should Greece become the first euro nation to declare sovereign default on its soaring debt. Her finance minister, Wolfgang Schäuble, told the same MPs, according to reports in Berlin, that Athens' latest pledges over spending cuts fell well short of what was needed.

EU ministers demanded that the three party leaders of the caretaker coalition under Papademos deliver signed pledges on the programme, making them binding and irreversible regardless of who wins an early general election expected in April.

"This certainly violates the sovereignty of the country and doesn't allow democratic choices to work," a government minister from a southern eurozone country told the Guardian. "But it's tough when you need the money."

Papademos told the cabinet, which endorsed the loan agreement tonight, the country had no choice – "our priority is to do whatever it takes to approve the new economic programme". Anyone who disagreed would have to leave the government.

The aim of the second Greek bailout in two years is to cut the country's debt from 160% of gross domestic product now to 120% by 2020. Ostensibly this is to be achieved by €130bn from the eurozone and the IMF, combined with swingeing spending cuts and tax rises and a write-down of debt by the country's private creditors through a debt swap pact halving the burden from €200bn to €100bn. But the €130bn is no longer viewed as sufficient and Schäuble was said to have told MPs that under Greek pledges the debt level would still be between 128% and 136% of GDP by 2020.

Separately, in an embarrassing admission captured on camera during a meeting in Brussels, Schäuble assured the Portuguese finance minister he would be prepared to adjust the terms of Portugal's €78bn bailout programme once the Greek situation was resolved – remarks viewed as incendiary given the tough line taken with Athens. "If there appears a necessity for an adjustment in the Portuguese programme we would be ready to do that," Schäuble said. Portugal's Vitor Gaspal replied: "That's much appreciated."

The eurozone's finance ministers are to meet again in Brussels on Wednesday to sign off on the bailout terms and the debt swap pact on condition that Athens has met the stringent conditions.

Karatzaferis, leader of the extreme right Laos party in the three-party coalition, said he would vote against the austerity package and was willing to quit the coalition in protest. "Greece can't and shouldn't do without the European Union, but it could do without the German boot," he said. "What has particularly bothered me is the humiliation of the country."

The other two coalition partners, the Pasok socialists and the conservative New Democracy, have a sweeping parliamentary majority and do not need Karatzaferis's 16 votes. The Pasok deputy labour minister, Yannis Koutsoukos, who resigned in protest on Thursday, accused the "troika" – officials from the European commission, ECB and IMF – of behaving "in an extortionate manner that is completely improper and shameless".

Greece crisis reaches boiling point as Athens asks if it can stay in the euro | World news | The Guardian