Turkey to raise arms expenses to historic high

By Umit Enginsoy

FNSS secured a $600 million contract with Malaysia this year to sell its 8X8 Pars vehicles, the largest export deal in Turkey’s history.

Turkey will spend close to $5 billion for defense procurement this year, the highest in the country’s history, a senior procurement official said on the weekend.

“Some major spending items have just started or are starting now, including those for the purchase of [around 100] Joint Strike Fighter jet aircraft [JFSs], submarines and utility helicopters,” said the official, who was speaking on condition of anonymity. “As a result, the arms spending is jumping, approaching $5 billion this year. Thank God, the general economic situation of the country is fine.”

In recent years Turkey has spent just over $4 billion a year on defense procurement.

Turkey’s ambitious military modernization program calls for the acquisition of the most sophisticated weaponry for the Land Forces, the Navy and the Air Force. In addition, the procurement office has made local acquisition a priority in meeting the military’s equipment demands.

Two large-scale programs are expected to begin this year; the first is Turkey’s national long-range air- and missile-defense project for which U.S., European, Russian and Chinese companies are vying to be selected as the main contractor. Turkey’s selection for the multi-billion-dollar contract is expected late this year or early next year.

Second, Turkey is preparing to soon select a Landing Platform Dock, which resembles a helicopter carrier and can carry a battalion-sized force of more than 1,000 troops overseas. Three Turkish shipyards and their foreign partners are eyeing the contract, which will be worth between $500 million and $1 billion. Turkey’s decision is expected next summer.

“There’s enough reason to think that the defense procurement budget will continue to increase gradually over the next few years to reach another saturation point,” the procurement official said.

Part of the rise in Turkey’s arms procurement budget is expected to be compensated by a parallel increase in the local defense industry’s export capabilities. The Turkish defense industry this year is expecting to garner between $1 billion and $1.5 billion from exports of defense-related equipment.

The largest sector in the Turkish defense industry’s exports business is armored vehicle makers. Among these companies, FNSS secured a $600 million contract with Malaysia this year to sell its 8X8 Pars vehicles, the largest export deal in Turkey’s history.

Also, under a new measure adopted by Turkey’s defense procurement agency, Ankara is slated to retain at least 70 percent of the money it spends for defense purchases from other countries. For past contracts, this figure was 50 percent.

In a directive released late April, the Undersecretariat for Defense Industries said foreign defense companies doing business with Turkey should agree that 70 percent of the contract’s value be returned through local industry content and offsets.

In other words, if a foreign company signs a defense contract worth $100 million with Turkey, it will agree to return $70 million of this money through its payments to its Turkish partners for their local work on the project or through offsets.

In defense industry contracts, an offset is an industrial compensation. It is a commitment provided by the selling country to the purchasing country to buy defense-related products manufactured by the buying country in return for the main sale.

“Financially speaking, I think we’re doing a good job by keeping the larger part of the contract money in the country, and in the meantime, obtaining knowhow,” said the procurement official.

HDN

UN delays release of flotilla report at Israel’s request

A UN panel investigating a bloody Israeli interception of an aid flotilla on May 31, 2010, has postponed, once again, the release of its findings to allow for further efforts for Turkish-Israeli reconciliation.

The request for the delay came from Israel, officials said. The report was first expected to be released on July 7, but was postponed to July 27 to provide an opportunity for closed-door negotiations between Turkey and Israel on normalization of their relations to succeed. However, those negotiations failed to produce a solution. The UN panel’s report is now expected to be released on Aug. 20.

Israeli Defense Minister Ehud Barak, a proponent of reconciliation with Turkey, said on Sunday that he hoped the repeatedly deferred publication would again be pushed back “to provide more time to examine matters in-depth.”

Meanwhile, Turkey and Israel are preparing for a new round of discussions on reconciliation. Foreign Ministry Undersecretary Feridun Sinirlioğlu is set to travel to New York for talks with Israeli officials on Tuesday.

Turkey scaled down its relations with Israel after Israeli commandos killed eight Turks and one Turkish-American on one of the ships that took part in the aid flotilla, the Mavi Marmara. Turkey wants an apology for the bloody raid, a demand that has created rifts within the Israeli Cabinet.

On Sunday, Israeli Foreign Minister Avigdor Lieberman, a strong opponent of an apology, said he would not resign if the government decides to apologize to Turkey. “Whether or not there is agreement in the government about this matter, this government is strong,” he told reporters. “No one is looking for excuses and reasons to leave the government.”

Israel’s debate over apologizing to Turkey has been spurred by its expectation that the UN report on the high seas interception will largely vindicate its Gaza blockade strategy. But Turkish Prime Minister Tayyip Erdoğan, who has shown willingness to engage Hamas, the party that runs Gaza, on Saturday reiterated his view that the blockade is “illegal and inhuman” and insisted Israel must end it as another condition for rapprochement.

“He’s not exactly making it easy for us to apologize,” an aide to Israeli Prime Minister Benjamin Netanyahu told Reuters in response.

Servet Yanatma, TZ

Israel’s Lieberman to flotilla: give up your plans

Israeli foreign minister Avigdor Lieberman

Israel’s foreign minister urged would-be participants of the pro-Palestinian flotilla to give up their plans and deliver their aid to UN supervised ports for distribution.

Avigdor Lieberman spoke to reporters Thursday after meeting with Austrian Foreign Minister Michael Spindelegger, on issues that both men said included the flotilla as well as efforts by Palestinian leaders to gain UN recognition of a Palestinian state.

Spindelegger said that Austria had not yet made up its mind on UN recognition, adding that he preferred a joint EU approach to the issue

Between 300 and 400 international activists aboard 10 ships had been due to sail this week to Gaza to try and break the naval blockade Israel imposed after Hamas militants overran the Palestinian territory in 2007. But their departure has been beset by delays that the activists blame in part on Israel.

Last year, an Israeli raid on a similar flotilla killed nine activists on a Turkish vessel with each side blaming the other for the violence. On Thursday, Lieberman refused to be drawn on what means the Jewish state would apply this time to prevent a breach of the blockade.

Instead, he said Israel wanted organizers to bring their aid to ports “where there are UN authorities” who will the distribute the supplies.

Lieberman also said Iran is using the smoke screen of Mideast unrest to advance both its missile and nuclear programs.

Zaman/AP

Fighter Jet Engines ‘Stolen from Israeli Base’

Israel’s military police on June 13 opened an inquiry into the theft of airplane parts, a spokeswoman said without confirming press reports that eight fighter jet engines had been stolen.

“The military police have opened an inquiry into the matter,” she told AFP without giving further detail or confirming reports of the theft from Tel Nof airbase near Tel Aviv.

Air force officials quoted in the Maariv newspaper said the stolen parts were eight engines from F-15 and F-16 fighter jets which were taken from Tel Nof air base.

They said it was not immediately clear when the theft took place but said the parts were no longer in use and had most likely been stolen for their value as scrap metal, the paper said.

Investigators quoted by the paper said each engine weighed “several tons” and could only have been taken away on large trucks, prompting speculation that the thieves had help from inside the base.

Military officials quoted by Israel HaYom newspaper described the theft as “very serious.”

AFP

Turkey’s options in handling the Syrian crisis

by Hasan Karaahmet

As Syria’s Assad regime continues to struggle in containing the widespread uprisings and demonstrations for a more democratic, progressive political system throughout the country, neighboring Turkey is facing an increasingly difficult humanitarian crisis just north of the long border.

Last Thursday, Turkey’s Foreign Minister Mr. Ahmet Davutoglu spoke with his Syrian counterpart, Walid al-Moallem, about the changing security environment in Syria and implications for Turkey. Movement of Syrian troops north near the Turkish border in an attempt to control the outflow of Syrian refugees into Turkey was among the critical subjects the two ministers discussed. It is no secret now that the situation at the border and increasing numbers of Syrian refugees in Turkey, now approaching some 20,000, is creating tensions between the two countries.

Thus far, Turkey’s AKP government has followed a bi-polar political strategy in handling the Syrian crisis. It publicly criticized Syrian President Bashar al-Assad while quietly advising the same regime on how to contain and eliminate the opposition using tangible, progressive reforms. On the other hand, Turkey also hosted open platforms for Syrian opposition leaders on Turkish soil, in order to provide guidance and discuss their strategies in toppling the Assad regime and achieving a higher political presence in Syria.

Currently, Turkey seems to have three options in peacefully diffusing the threatening situation beyond its southern border and stopping the inflow of Syrian refugees.

  • (1) The first option Turkey is suggesting to Syria involves removal of Bashar al-Assad’s brother, Maher al-Assad, who leads the Syrian Republican Guard and is primarily responsible for killing and mistreatment of a great number of Syrian opposition members. Turkish authorities have wisely avoided condemning Bashar al-Assad and kept their focus on Maher instead. According to a June 18th report by Al Arabiya, an emissary of Turkish Prime Minister Mr. Recep Tayyip Erdogan traveled to Syria to ask Bashar to fire his brother. This suggestion requires Maher to be exiled to Turkey or another suitable country where he would be monitored and kept away from militancy and interfering with Syrian internal politics. Turkey points out that such a move would portray Bashar as a truly progressive, reformist leader who is willing to exile his brother for the greater good of Syria.

Some western analysts generally unfamiliar with the region point out that this option undermines the role of Maher in keeping different factions of the Syrian Armed Forces together and suggest that exiling Maher may push Syria into an explosive infighting and eventually even partitioning. I, however, disagree with this observation as I believe it is the Assad family as a whole and its surrogates within the Syrian state that provide the said unifying function. Power of the al-Assad clan is currently personified in Bashar al-Assad, and any decision he makes, even as radical as firing his brother, will be readily digestible by the forces in Syria that determine the political and economic dynamics in that country. So long as the Alawites’ traditional hold of economic power in Syria’s western coastal cities is not damaged, their support of Bashar and the al-Assad family in general will remain strong.

That said, we should not forget that the former Syrian President, Bashar’s father Hazef al-Assad did successfully exile his younger brother Rifaat al-Assad, also a military man, after a coup attempt, a move that demonstrated the reach of his power and strengthened his regime for years to come. I believe the same may as well be the case for his sons.

  • (2) The second option Turkey is working on for Syria is similar to the Lebanese political model, where a confessional system based on a 1932 census is in effect that just about equally divides power among Lebanon’s Christian and Muslim factions. Proposal for Syria would similarly allocate the power, and hence resources, somewhat equally among the country’s majority Sunni Arabs, Turkmens and Kurds, and minority Alawites, Christians and Druze. This new system would create strong checks and balances that would prevent either side from dominating the economy or monopolizing the politics of Syria.

Turkey is ready to provide all the assistance needed for accomplishing this. If completed successfully, it would score an important point for Turkey in the country’s ambitious mission to become a prestigious leader and a secular democracy model for the Islamic world.

  • (3) The third option proposes the legalization of the Syrian Muslim Brotherhood (MB). At the moment, membership in the group is not only outlawed in Syria, but also punishable by death. Turkey says legalization of the Syrian MB and turning the group into a legitimate political party would limit its militancy and draw the movement closer to a more peaceful, political struggle. This would, in effect, dramatically defuse the Syrian crisis.

Al-Assad is however seems to be currently against the idea as it bears the potential for eventually growing in power via unification of the majority Sunni base turning into electoral votes and undermining the established power of Al-Assad’s Baath party and the economic monopoly of Syria’s Alawites.

It will be interesting to see the events unfold and watch Turkey make its moves before the crisis grows into an even bigger refugee crisis, and with the movements of even more Syrian military units into the border region, starts posing a national security danger for Turkey.

TR Defence

Turkey’s Actions May Trigger NATO Confrontation With Syrian Military

Last week, a feature by Secretary of State Hillary Clinton excoriating the political leadership of Syria appeared in the London-based Arabic-language daily Asharq Al-Awsat. Saudi-supported and printed in twelve locations, it is considered to be among the most influential newspapers in the Arab world.

As such, her comments (in English and Arabic) were intended to signal to Arab readers and the world at large that the American position toward Damascus is becoming more stringent and confrontational, evoking Clinton’s statements toward the leadership of Ivory Coast and Libya earlier in the year.

Her characteristically imperious, contemptuous and inflammatory comments, indeed threats, included:

“In his May 19 speech, President Obama echoed demonstrators’ basic and legitimate demands…President Assad, he said, could either lead that transition or get out of the way.

“It is increasingly clear that President Assad has made his choice.”

“…President Assad is showing his true colors by embracing the repressive tactics of his ally Iran and putting Syria onto the path of a pariah state.

“By following Iran’s lead, President Assad is placing himself and his regime on the wrong side of history…”

“If President Assad believes he can act with impunity because the international community hopes for his cooperation on other issues, he is wrong about this as well. He and his regime are certainly not indispensable.”

The Wall Street Journal reported on June 18 that the Washington administration is preparing a case against Syrian President Bashar Assad and other government officials at the International Criminal Court in the Hague. The same newspaper feature added that “The U.S. is also exploring ways to more directly target Syria’s oil and gas revenue…”

On June 14 four members of the North Atlantic Treaty Organization, including the military alliance’s three European powerhouses – Britain, France, Germany and Portugal – proposed a draft resolution in the United Nations Security Council aimed at Syria. Three days later in Berlin German Chancellor Angela Merkel and French President Nicolas Sarkozy confirmed their governments would push for a new UN resolution targeting Syria. In Sarkozy’s words: “France, hand in hand with Germany, calls for tougher sanctions against Syrian authorities who are conducting intolerable and unacceptable actions and repression against the population.”

The USS George H.W. Bush nuclear-powered supercarrier and its assigned carrier strike group and carrier air wing – with 9,000 sailors, 70 aircraft and four guided missile destroyers and cruisers – is in the Mediterranean Sea not far from the Syrian coast. One of the destroyers, USS Truxtun, just left the Israeli port city of Haifa after a two-day stopover.

The USS Monterey guided missile cruiser is docked off the Georgian Black Sea city of Batumi currently and will re-enter the Mediterranean soon. Deployed as the first warship assigned to the U.S.-NATO potential first-strike pan-European interceptor missile system, it can launch Tomahawk cruise missiles as well as Standard Missile-3 interceptor missiles.

The guided missile destroyer USS Barry left Gaeta, Italy where nine other US. warships have been stationed, on June 17 after a five-day port visit. USS Barry is part of the Bataan Amphibious Ready Group, headed by the amphibious assault ship USS Bataan, used at the beginning of the U.S.-NATO Libyan campaign in March and currently in the Mediterranean.

The Pentagon and its allies – every nation in the Mediterranean is now a NATO member or partner except for Libya, Syria, Cyprus (under renewed and intensified pressure to join the bloc’s Partnership for Peace program) and Lebanon (whose coastline has been blockaded by NATO states’ military vessels since 2006) – have the military hardware in place for a replication of the 95-day war against Libya directed at Syria: Scores of warplanes on carriers and on bases in Italy, Greece, Cyprus and Turkey and guided missile ships ready to launch Tomahawk missiles.

On June 19 Ersat Hurmuzlu, senior adviser to Turkish President Abdullah Gul, told the United Arab Emirates-based Al Arabiya television channel that Syria has less than a week to respond to what Reuters described as “calls for change.” Hurmuzlu’s exact words were:

“The demands in this field will be for a positive response to these issues within a short period that does not exceed a week.

“The opposite of this, it would not be possible to offer any cover for the leadership in Syria because there is the danger …that we had always been afraid of, and that is foreign intervention.”

Although the last sentence can be read as either warning or threat, it is in fact the second. The statement as a whole is an ultimatum.

Since the war against Libya was launched by U.S. Africa Command under the codename Operation Odyssey Dawn to the present NATO-run Operation Unified Protector in place since March 31, air operations have been run from NATO’s Air Command Headquarters for Southern Europe in Izmir, Turkey.

In March Turkey supplied five ships and a submarine for the blockade of Libya’s coast and on March 28 Hurriyet Daily News announced that Turkey was “assuming control of the Benghazi airport, and sending naval forces to patrol the corridor between the rebel-held city and Crete,” quoting Prime Minister Recep Tayyip Erdogan:

“Turkey said ‘yes’ to three tasks within NATO: the takeover of Benghazi airport for the delivery of humanitarian aid, the task about control of the air corridor and the involvement of Turkish naval forces in the corridor between Benghazi and Crete.”

In 2003 the U.S. ambassador to NATO at the time, Nicholas Burns, stated in testimony to the Senate Foreign Relations Committee:

“NATO needs to pivot from its inward focus on Europe – which was necessary and appropriate during the Cold War – to an outward focus on the arc of countries where most of the threats are today – in Central and South Asia, and in the Middle East.

“NATO’s mandate is still to defend Europe and North America. But we don’t believe we can do that by sitting in Western Europe, or Central Europe, or North America. We have to deploy our conceptual attention and our military forces east and south. NATO’s future, we believe, is east, and is south. It’s in the Greater Middle East.”

Earlier this month Turkish Defense Minister Vecdi Gonul announced that Izmir will also be the new home of the Alliance’s Land Force Command, consolidating and transferring ground forces currently stationed in Germany and Spain to the Izmir Air Station.

On June 17 Turkey took over command of Standing NATO Maritime Group-2 which, with Standing NATO Maritime Group-1, is part of the NATO Response Force and centers its activities in the Mediterranean. Each group consists of between 4-8 warships – destroyers and frigates – and since 2005 has expanded its missions through the Suez Canal to the Gulf of Aden and the Somalia coast, circumnavigating the African continent in 2007 and traveling the length of the Atlantic coast of the U.S., then entering the Caribbean Sea the same year, the first time NATO had ever deployed to the Caribbean. The NATO naval groups have also sailed to Africa’s Gulf of Guinea, the Persian Gulf and the Baltic Sea among other locations.

Turkey hosted a conference of Syrian opposition forces called “Change in Syria” from May 1-June 2 in the city of Antalya. Although held under the sponsorship of the Egyptian-based National Organisation of Human Rights, logistics and security were provided by the host country.

Had Syria allowed a gathering of Turkish opposition groups whose express intention was the overthrow of the government in Ankara, one can only imagine the Turkish administration’s reaction.

On June 13 Britain’s The Guardian, since the Balkans crisis began in the early 1990s never slow to fan the flames of moral panic over humanitarian crises, with techniques ranging from hyperbole to hysterics, in order to alarm and neutralize its readership into acquiescence to Western military action (while claiming formally, if not convincingly, that it is not advocating the latter), ran an editorial titled “Syria: Butchery, while the world watches,” which let the cat out of the bag regarding the prospect of U.S. and NATO military intervention in Syria by stating:

“Turkey, a member of Nato, could yet drag the west in, if it decides its own interests require action to defend its borders from the [Syrian] refugees The world would then pay a high price indeed for having pretended that Assad was somebody else’s problem.”

On June 19 the major Turkish daily newspaper Zaman quoted Veysel Ayhan of the Center for Middle Eastern Strategic Studies harking back to the rationale for NATO’s first military actions 16 years ago:

“Remember when NATO was accused by the international media and public of not being able to prevent 8,000 Muslim Bosnians from being murdered in front of the world’s eyes? As a member of NATO and a country whose border is about to witness such a massacre by the Syrian army, Turkey will not allow such a thing to happen again, especially before its own eyes.”

Last week Turkey’s President Erdogan and Foreign Minister Ahmet Davutoglu were reported to have toughened demands on Syria in a meeting with President Assad’s special envoy Hasan Turkmani in Ankara, and on January 18 Al Arabiya reported that Ankara had dispatched an envoy to Damascus to demand that Assad’s brother Maher relinquish his command of the Republican Guard and the Fourth Armored Division.

Zaman recently cited what was identified as a pro-government Syrian official saying to the United Arab Emirates-based daily The National:

“The West wants to put the region under Turkish control like in the Ottoman days. Turkey is a NATO member and embodies a safe kind of Islam for the West, so they have done a deal to give everything to Ankara.”

Should a conflict erupt between Turkey and Syria on their border, NATO will be obligated under its Article 5 collective military assistance clause to enter the fray on Turkey’s side. Should NATO intend opening hostilities against Syria, no better pretext could be devised than that scenario.

In February of 2003, on the eve of the U.S. and British invasion of Iraq, in NATO’s words “Turkey requested NATO assistance under Article 4 of the North Atlantic Treaty.”

“NATO’s Integrated Air Defence System in Turkey was put on full alert and augmented with equipment and personnel from other NATO commands and countries.”

Four Alliance Airborne Warning and Control System (AWACS) aircraft were deployed from their base in Germany to the Forward Operating Base in Konya, Turkey. Three Dutch and two American Patriot missile batteries were deployed to the country in March of that year, and “Preparations were made to augment Turkey’s air defence assets with additional aircraft from other NATO countries.”

Article 4 of the 1949 Washington Treaty, NATO’s founding document, states:

“The Parties will consult together whenever, in the opinion of any of them, the territorial integrity, political independence or security of any of the Parties is threatened.”

Article 5 says:

“The Parties agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all and consequently they agree that, if such an armed attack occurs, each of them, in exercise of the right of individual or collective self-defence recognised by Article 51 of the Charter of the United Nations, will assist the Party or Parties so attacked by taking forthwith, individually and in concert with the other Parties, such action as it deems necessary, including the use of armed force, to restore and maintain the security of the North Atlantic area.”

If Turkey opens armed hostilities with its neighbor, the conflict will not remain a local one for long.

Scoop

Syrian refugees in Turkey near 12,000

Turkish Red Crescent has established thousands of temporary shelters along the border to help accomodate the large inflow of Syrian refugees.

The number of Syrians sheltering in Turkey  has approached 12,000 after some 1500 refugees poured across the  border on Thursday and Friday, officials said.

The new exodus was triggered on Thursday morning when Syrian  troops backed by tanks entered a border zone where thousands  fleeing a bloody crackdown on anti-regime protesters were camping,  hesitant to cross to Turkey.

Turkey’s emergency situations agency said on Friday that 1578  Syrians had crossed into Turkish territory, bringing the total  number to 11,739.

Fifty people, including 15 with gunshot wounds, remain in  hospital, the statement said.

The Turkish Red Crescent has erected several tent cities in the  border province of Hatay to shelter the refugees.

Turkish authorities continue to provide food to those who remain  camping on the other side of the border, the statement said.

Crammed into a narrow strip along the Turkish frontier, the  displaced Syrians have braved squalid conditions, sleeping rough or  in makeshift shelters of branches and plastic sheets, surviving on  scarce food and water.

They have hesitated to cross to Turkey, gripped by uncertainty  over a future on foreign soil and wary of leaving their property  behind.

Turkish authorities have reportedly assured them they can cross  over if they felt threatened.

Sky News

Turkey sets example, Papandreou says

Greek Prime Minister George Papandreou. AFP photo

Addressing lawmakers ahead of Tuesday night’s crucial confidence vote, Greek Prime Minister George Papandreou said Turkey sets an example in his country’s struggle against a devastating economic crisis. “Why can’t we do what our neighbors Turks have done?” he asked.

Speaking at the parliament, Papandreou noted that Greece is going through one of the worst crises in its history. “Other countries have experienced similar crises, but in the end they managed to get out of the hole,” he said.

“Turkey had gone through a similar crisis, but today it has a strong economy,” said the Greek PM. “Other peoples lived through similar things, but they withstood and prevailed. Brazil, South Korea, Uruguay, Estonia did it. Our neighbors, Turks, how have they managed to have a dynamic economy today? Can’t we do it? We will.”

AA

Aselsan bags national missile system contract

An artist's conception of the Turkish Medium-Range Air Defence System (T-MALAMIDS)

Turkey’s leading military electronics company Aselsan and the Undersecretariat for Defence Industries, or SSM, have signed two major contracts for the development of indigenous low and medium altitude air defence missile systems, the company revealed in a special press release on Monday.

Request for proposal for the low level air defence system (T-LALADMIS) was first issued by SSM in September 2008, and entails the procurement of 18 self-propelled, armored air defence systems, support and training equipment, maintenance tools, spare parts and other relevant services and documents required for the efficient operation of the systems. An option also exists for 27 additional such systems in the immediate future.

Also awarded to Aselsan is a medium-range air defence system development program, dubbed T-MALADMIS, and it entails direct procurement of one medium altitude air defense missile system composed of one battalion headquarters and headquarters company and three batteries, each of which has a sufficient amount of launchers, missiles, radars, command-control and communication systems and other support equipment.

Cost of Aselsan’s T-LALADMIS program design and development is 314,920,445 EURO, while T-MALADMIS amounts to 241,392,218 EURO.

Turkey is also seeking to acquire 12 long-range air defence systems as part of SSM’s $4 billion T-LORADMIS program. USA-based Patriot PAC-3 and Russia’s S-300 are currently favorites in a tough competition against China’s HQ-9 and European Aster-30 air defence systems.

Greek politics in turmoil over austerity measures

Athens, Greece (AP photo)

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 euros ($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 PM 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.

A bad day for equities

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 4 cents in just a couple of days.

“The Greek crisis is spinning out of control,” said Kit Juckes, an analyst at Societe Generale.

Germany’s vice chancellor on Thursday insisted that Greece’s private creditors must share the pain of a new long-term bailout for the debt-laden country. Economy Minister Philipp Roessler said Thursday a new bailout package will require parliamentary approval and can only be considered with a “substantial contribution by private creditors.”

EU officials say discussions over a longer-term bailout for Greece are likely to be delayed until July as policymakers are split over how to get private creditors to share the pain – a move some experts say would 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 euros ($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.”

AP