Greece appeared to step back 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 new 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 a $39.5 billion package of steep tax hikes and budget cuts so despised by Greeks that riots exploded outside parliament this week.
European donors and the International Monetary Fund require Greece to pass the austerity measures before they will release the next $17 billion loan from a $126 billion package agreed on last year to keep Greece afloat until it can get its struggling economy back on track.
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, hiking borrowing costs for eurozone countries.
Apparently, frightened by the prospect of a near-term default, Germany on Friday calmed fears that it planned to force losses on banks and other private investors as part of a second bailout.
In recent weeks, German Chancellor Angela 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.
"It is about a voluntary participation of the private sector," Merkel said after meeting French President Nicolas Sarkozy in Berlin.
Instead, Merkel backed a softer form of private sector involvement, in which banks would be asked to buy Greek bonds as old ones expired.
Markets welcomed the developments in Athens and Berlin. Yields on Greek 10-year bonds dropped more than a percentage point to the still sky-high level of just under 17 percent, while the Athens Stock Market closed up 3.8 percent at 1,254.02.
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."
Papandreou's new government now must win a confidence vote in Parliament, where his Socialists have a majority of five seats. The vote is likely to come at midnight Tuesday.
Socialist dissenters have given no indication they will vote against the government, but one rebel said he would not back new austerity measures without "major changes."
If the government clears that hurdle, Greece appears headed for a second bailout. But the country still faces years of trying economic times if it is going to get on top of its nearly $400 billion debt.