Greek bond yields are heading back towards 10% and the euro has fallen to near $1.48.
Greece’s Prime Minister is being forced to become more populist as his political support deteriorates.
This means austerity is at risk of being massively watered down.
“We have not yet escaped the danger. I am sounding the alarm,” said Mr Papandreou.
While he promised to stick to the EU-IMF austerity plan, he threatened to go to the country if upcoming local elections fail to give his socialist PASOK party a clear mandate. “There can no deadlock in democracy, the people have the power to decide,” he said.
The main opposition group New Democracy has yet to give a watertight pledge that it would abide by the terms of the EU’s €110bn (£97bn) rescue, or the “Memorandum” as it is known.
PASOK itself is fraying at the edges in any case. A socialist rebel candidate from the “anti-Memorandum” bloc leads the polls for the Athens region.
Mr Papandreou is responding with populist gestures, granting pensioners a €300 bonus and rejecting calls by Brussels and his own central bank for further belt-tightening. “There will be no new measures on wage-earners or pensioners, they have paid enough,” he said.