Greek lawmakers endorse austerity despite violence (Reuters)

ATHENS (Reuters) – Greece's parliament approved deeply unpopular austerity measures despite worsening street violence on Wednesday, in a vote vital to secure international aid and prevent the euro zone's first sovereign debt default.

Lawmakers passed a five-year package of spending cuts, tax rises and state asset sales by a comfortable margin of 155 votes to 138 in a roll-call vote, handing a victory to embattled Prime Minister George Papandreou.

"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers just before the vote.

The solid margin suggested the government should be able to push through laws implementing specific budget measures and asset sales on Thursday, clearing the last obstacle to obtaining 12 billion euros ($17.3 billion) of emergency loans.

But with the country on the brink of bankruptcy and social unrest mounting, it is unclear whether the government can stick to the tight schedule imposed by the European Union and the International Monetary Fund to implement the austerity steps, even if it wins all this week's parliamentary votes.

The full pain of pay and benefit cuts and sharp tax increases has yet to be felt, and public anger is boiling.

Outside parliament, there were clashes between stone-throwing masked youths and riot police, who fired clouds of teargas from behind steel crash barriers to keep rioters at bay.

One group of anarchists armed with staves and iron bars attacked finance ministry offices just off Syntagma Square, smashing windows at the entrance and on higher floors. A post office on the ground floor of the ministry building was set on fire, sending acrid grey smoke billowing into the sky.

In cat-and-mouse clashes with police, rioters erected makeshift barricades with benches, chairs and garbage bins on the fringes of the square, where thousands of peaceful protesters demonstrated against the austerity plan.

Chancellor Angela Merkel of Germany, Europe's reluctant paymaster and the main contributor to the bailout of Greece, was quick to praise the "brave" vote. But Finance Minister Wolfgang Schaeuble stressed the importance of "implementing these (measures) with resolve in the coming weeks, months and years."

The presidents of the European Council and the European Commission, Herman van Rompuy and Jose Manuel Barroso, said in a joint statement that Greece had taken "a vital step back -- from the very grave scenario of default."

However, many economists and investors still expect Greece to default in the medium term because its 340 billion euro pile of sovereign debt is so huge, about 150 percent of the country's annual economic output. A senior German ruling coalition politician, Free Democratic floor leader Rainer Bruederle, said on Wednesday that a debt restructuring was inevitable.

Expectations for a positive vote and progress in talks between banks and euro zone governments on a rollover of privately held Greek debt lifted the euro and global stocks on Wednesday. Prices of bonds issued by the zone's weaker states rose.

But markets then fell back slightly after news of parliament's decision.

"This is logical and may continue over the next couple of hours and days as markets will quickly realize that this is only a first step on the road to recovery," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"We still expect a hot, nervous and volatile summer."

ROLLOVER

Despite a threat by trade unions staging a 48-hour general strike to prevent lawmakers entering the colonnaded parliament building, deputies were able to reach the chamber. Strikes and sporadic violence have not blown the government off course so far, but its approval rating has plunged in recent months.

Only one deputy in the ruling PASOK party voted against the plan and was immediately expelled from the party by Papandreou. At least one opposition deputy broke ranks with the main conservative New Democracy party and voted "yes."

PASOK now holds 154 seats in the 300-member chamber and it was helped on Wednesday by the abstention of a small center-right splinter group of five deputies led by former foreign minister Dora Bakoyanis.

The EU and the IMF have insisted Greece must adopt the austerity plan, which seeks to save the government 28 billion euros, in order to receive its next slice of aid. Without the money, Athens would run out of cash within weeks.

In May last year Greece signed a 110 billion euro bailout deal with the EU and the IMF, which later jumped in to keep Ireland and Portugal afloat as the euro zone reeled from high government debt in the wake of the global financial crisis.

If Greece's fiscal legislation passes on Thursday, euro zone finance ministers meeting in Brussels on Sunday are expected to agree to release their part of the next aid tranche, with the IMF following on July 5.

Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout.

The new program would involve some 30 billion euros in private-sector participation via a "voluntary" rollover of maturing debt, a similar sum from Greek privatization revenues, and an expected 55 billion euros in new official funding.

Banking sources said politicians and commercial bankers were confident that credit rating agencies would accept a French proposal for a voluntary private sector rollover of Greek debt without triggering a default or a payout of credit insurance.

The agencies have made no public comment on the plan, details of which are still under negotiation.

Euro zone banks and insurers are considering a scheme under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's economic growth rate.

Of the other half, 30 percent would be paid back to investors in cash and 20 percent invested in a "guarantee fund" of zero-coupon AAA securities with deferred interest that might be issued by the euro zone's bailout fund, officials and banking sources said.

In addition to the rating agencies, the rollover scheme will need the approval of the European Central Bank, and ECB policymaker Juergen Stark rejected on Wednesday any scheme that involved EU guarantees of bonds, saying it would breach European treaty rules.

Asked about a scenario in which banks would exchange their Greek bonds for new paper guaranteed by EU states -- an approach similar to the "Brady bonds" used in Latin America in 1989 -- he said: "This instrument is disqualified.

French banks had the largest exposure to the Greek economy, both the public and private sectors, at the end of 2010 with over $56 billion, data from the Bank for International Settlements shows. The next most exposed country is Germany.

(Additional reporting by George Georgiopoulos, Daniel Flynn and James Mackenzie in Athens, Philipp Halstrick and Ed Taylor in Frankfurt, Stephen Brown in Berlin, and Atul Prakash and Jeremy Gaunt in London; writing by Paul Taylor; editing by Janet McBride and Andrew Torchia)

Greek ministers urge backing for austerity plan (Reuters)

(Reuters) – Greek ministers and policy makers urged parliament on Saturday to do its duty next week and pass a deeply unpopular set of austerity measures international lenders have demanded as the price for staving off bankruptcy.

With Greece teetering on the edge of defaulting on its huge public debt, Finance Minister Evangelos Venizelos offered to talk to wavering deputies from the ruling Socialist Party, at least two of whom have said they will oppose the measures in crucial votes on Wednesday and Thursday.

"I believe that the sense of responsibility will ultimately prevail, the God of Greece is great," he told TV station Alter.

Without parliamentary approval for the measures, the European Union (EU) and International Monetary Fund (IMF) have said they will not release a vital 12 billion euro ($17.2 billion) loan tranche and the government would run out of cash within days.

On Friday, Prime Minister George Papandreou's already slim majority was further undermined when a deputy from his PASOK party said he would vote against the measures, joining another party rebel who announced his opposition earlier this month.

Papandreou's government has 155 seats in the 300-strong parliament, having seen five defections since it came to power in October 2009 with 160 deputies.

With the economy stuck in its deepest recession since 1974 and youth unemployment running at over 40 percent, the mix of spending cuts, state sell offs and tax hikes demanded by the EU and the IMF has caused bitter resentment among ordinary Greeks.

A two-day general strike is planned next week to coincide with the votes, following a series of protests and rolling strikes at companies including Greece's main electricity group PPC, which is slated for privatization next year.

Athens accepted a package of 110 billion euros of EU/IMF loans in May 2010 but now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

In a statement, Venizelos acknowledged the austerity plan was harsh and imperfect and relied too heavily on tax increases but he said it would give the government time to negotiate a new deal with the EU which could include extra stimulus measures.

"The 12 billion euros of the fifth tranche are absolutely necessary to meet the states' cash needs, which is nothing other than the immediate and vital needs of citizens," he said.

CAMPAIGN

On Saturday, government ministers and policymakers including Bank of Greece governor George Provopoulos gave a series of media interviews to hammer home the message that the measures must pass to give the government some breathing space.

Justice Minister Miltiadis Papaioannou urged his fellow MPs to back the unpopular measures. "They must shut their ears to all the criticism they are hearing and do their duty," he said in an interview on TV station Mega.

Ministers also sought to squash the view, expressed by some deputies, that the vital 12 billion tranche may be released even if the measures are not passed because lenders will not want to risk the financial market turmoil that would follow a default.

"Blackmailing Europe would be playing with fire.. we can't negotiate with kamikaze tactics. It's not responsible to threaten that we'll blow up Europe," Deputy Finance Minister Filippos Sachinidis told the daily Eleftherotypia.

Despite heavy pressure from European leaders including German Chancellor Angela Merkel, the conservative New Democracy opposition party has refused to support the package, meaning a handful of votes either way could decide the outcome.

However the Democratic Alliance, a small conservative splinter group with five MPs will decide on how it will vote at the last minute, its leader Dora Bakoyanis told a meeting.

"The stakes are very high, it is a great dilemma," Bakoyanis, said. A former conservative foreign minister, she broke party ranks last year to vote in favor of Greece's first EU/IMF bailout deal but has since criticized the government for bungling its implementation.

Papandreou last week sacrificed his previous finance minister, the unpopular technocrat George Papaconstantinou, in a bid to smooth the passage of the austerity plan but opinion polls still show him trailing the conservative opposition.

On Saturday, a poll by polling agency MARC for newspaper Ethos gave New Democracy leads a 1.4 percentage points lead over PASOK (21.4 pct to 20 pct).

(Writing by James Mackenzie; Editing by Michael Roddy; )

Greece in deal with EU/IMF on austerity plan: sources (Reuters)

ATHENS/BRUSSELS (Reuters) – Greece won the consent of international lenders Thursday for a five-year austerity plan intended to avoid looming bankruptcy, sources familiar with the talks said, and its prime minister pledge to push radical economic reforms through parliament.

After a day of wrangling in Athens, new Finance Minister Evangelos Venizelos clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap, the sources said.

"We have a deal," one of the sources said as Prime Minister George Papandreou was meeting fellow EU leaders at a Brussels summit dominated by Greece's debt crisis.

There was no immediate official confirmation, but the euro rebounded against the dollar and U.S. stocks pared losses after the Reuters report of the agreement.

European Union leaders insisted that the Greek parliament must enact deep spending cuts, more tax hikes and a major sell-off of state assets to secure desperately needed aid and avoid a potential default in mid-July.

Prime Minister George Papandreou said on arriving at a summit with fellow EU leaders he was committed to pushing the deeply unpopular austerity plan through parliament next week.

"Greece is committed, strongly committed, to continue a very important program for major changes, radical changes, to make our economy viable," he told reporters.

EU leaders also pleaded with conservative Greek opposition leader Antonis Samaras to rally behind the austerity program, but he maintained his refusal to vote for the plan.

Euro zone governments are meanwhile talking to banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a possible second rescue for Athens.

Venizelos, appointed last week, had wanted to change some measures Greece had already agreed with the EU, International Monetary Fund and European Central Bank and present a slightly softer package to parliament for approval on June 28, in an effort to win over an angry and frustrated Greek public.

But the changes meant Athens would have fallen short on its austerity promises, so the gap has been closed by lowering the income tax threshold to 8,000 euros and raise heating oil taxes.

"Our basic aim is to regain our credibility," Venizelos said.

Analysts welcomed the deal. "It helps that Greece is sticking to its austerity plan. Germany, EU and IMF are in active negotiation with Greece which will be stuck to. In general this is good news and it will help," said Perry Piazza, director of investment strategies with Contango Capital Advisors in SanFrancisco.

If the package is approved, the EU and IMF should release a next tranche of emergency loans -- 12 billion euros ($17 bln) -- by mid-July, allowing Athens to escape bankruptcy.

"All conditions must be met," Luxembourg Prime Minister Jean-Claude Juncker told reporters. "If Greece does what it has to do, we will do what we have to do. This is not a threat. It's just a confirmation that we're continuing our efforts."

German Chancellor Angela Merkel, who has taken perhaps the toughest line on Greece, urged the Greek opposition to do what was necessary and get behind the package. "In such a situation, everyone must stand together in a country," she said.

HELP GREECE TO HELP ITSELF

While Papandreou has expressed confidence over the June 28 vote in public, Slovak Prime Minister Iveta Radicova said he had voiced uncertainty in a private telephone call Wednesday.

"Papandreou has serious doubts about whether the necessary steps will pass in parliament," Radicova told the Slovak parliament's European affairs committee.

The Greek crisis dominated debate at the summit, the fourth the EU's 27 leaders have held this year as they grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts and roiled global financial markets.

No formal decisions were expected on Greece but the gathering will be monitored intensely by financial markets for any message it sends on whether the EU plan can work. Leaders were expected to agree a statement on Greece during a dinner on Thursday.

But investors are skeptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps, according to data monitor Markit, implying a more than 80 percent probability of default over that period.

U.S. Federal Reserve Chairman Ben Bernanke stressed on Wednesday that much more than the future of Greece was at stake.

"If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well," he said.

A Greek default would force European banks and governments to take big losses, spread contagion to other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, into recession.

GETTING BANKS ON BOARD

Even if Greece manages to persuade the EU and IMF that it is fully committed to making the budget adjustments demanded, it will only buy the government a few months' respite and most economists expect Athens will have to default eventually.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

Euro zone member states, led by Germany, insist any second aid package must involve the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default, potentially starting a chain reaction of turmoil in markets.

"We are working on a solution which is based on a voluntary rollover and I expect it will not create a credit event," Rehn said, explaining that part of the aim was to keep discussions on a national level so that voluntary agreement is reached.

At meetings Wednesday, banks and insurers in Germany, France, Spain and Belgium were asked by national financial authorities to roll over their holdings of Greek debt voluntarily when the bonds mature.

A financial source said Franco-Belgian banking group Dexia is prepared to roll over its exposure to Greek debt, the biggest among Belgian banks, adding to the list of banks prepared in principle to take part.

(Additional reporting by Martin Santa in Bratislava, Ben Deighton and Robert-Jan Bartunek in Brussels, Renee Maltezou, George Georgiopoulos, Dan Flynn and Lefteris Papadimas in Athens; Writing by Paul Taylor and Luke Baker, editing by Philippa Fletcher)