Markets ask what next when Papandreou quits?
Greek premier George Papandreou was facing defeat tonight in a critical confidence vote with a new government of national unity set to push through last week's 130 billion (£112 billion) package.
Papandreou, who triggered a week of turmoil by calling for a referendum on the deal before abandoning the pledge last night, has a wafer-thin majority of a single vote following defections.
Even if he wins he is still likely to step down, paving the way for a coalition between his socialist Pasok party and the New Democrat opposition before a fresh election.
Papandreou, whose father and grandfather led Greece, faces losing his grip on power after little more than two years. The collapse of the referendum plans withdraws a key hurdle to the release of the next 8 billion tranche of funds from the original IMF/European Union bailout in May last year.
Without the cash, Greece will be unable to make an 8 billion debt interest payment in December and crash into default. RBS European economist Silvio Peruzzo said: "The situation is obviously very fluid, but there is an understanding that the most likely outcome is a unity government, buying time for a couple of months to agree last week's package.
"But it doesn't resolve the more fundamental issues about implementing the reforms, which is going to be very tough on the Greek people.
"The key for Greece is getting the sixth tranche of its bail-out funds in December."
Greece's dire economy has been stuck in recession since 2009 and is not expected to return to growth until 2013, according to RBS.
Barclays Capital's Antonio Garcia Pascual said a coalition could seek to renegotiate the bailout package, although French president Nicolas Sarkozy and German chancellor Angela Merkel have refused to budge on the deal struck last week.
Jim O'Neill, chairman of Goldman Sachs Asset Management, said Greece was moving towards "some sort of endgame" although the wider threat of contagion remained. "Italy is now the real issue," he warned.
