ATHENS, Greece — Greece appeared to back away from the prospect of a devastating debt default Friday after its prime minister quelled chaotic political infighting and Germany softened a contentious demand that the private sector participate in a European bailout.
After two days of dissent inside his Socialist Party that threatened to bring down his government, Prime Minister George Papandreou named his main internal rival as finance minister. The move is expected to solidify the support from lawmakers Papandreou needs to pass $39.5 billion package of steep tax hikes and budget cuts so despised inside Greece that riots exploded outside parliament this week.
European donors and the International Monetary Fund require Greece to pass the austerity measures before releasing the next $17 billion loan to keep Greece afloat until it reins in spending and increases government revenue.
A Greek default could set off an unpredictable chain reaction that would badly hurt European banks, roil markets and make it harder for other indebted countries to cope with their debts, raising borrowing costs for eurozone countries
Apparently frightened by the prospect of a near-term default, Germany on Friday dropped its demand that the private sector be forced to share in the pain of a second bailout. In recent weeks, Merkel had backed her finance minister's calls for banks and other private bondholders to give Greece an extra seven years to repay its bonds. Rating agencies as well as the European Central Bank, however, warned that such a moved would likely count as a "credit event," a partial default by Greece that could spread panic on financial markets and hurt Greek banks.
Moving from his post as defense minister, new Finance Minister Evangelos Venizelos faces the immediate task of controlling budget overruns and setbacks in cost-cutting reforms, as well as pushing ahead with a massive privatization drive worth $70.5 billion.
At the same time, he will have to negotiate the vital second bailout package with Greece's frustrated international creditors.
"The country must be saved, and it will be saved," Venizelos said. "I am leaving defense today to go to the real war."