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)

No let-up in pressure on Greece despite vote (Reuters)

By Ingrid Melander and George Georgiopoulos Ingrid Melander And George Georgiopoulos – 2 hrs 45 mins ago

ATHENS (Reuters) – Europe kept the pressure on Greece to push forward with a painful austerity program on Wednesday after Athens cleared the first hurdle in avoiding a sovereign default.

European leaders congratulated Prime Minister George Papandreou on surviving a confidence vote but clearly wanted to keep the government's feet to the fire in the more difficult next stage -- implementing reforms rejected by many of the population.

"There is no alternative. We have a plan, now it's time to act on it, it's time to implement it. There is no alternative. There is no Plan B," European Commission spokeswoman Pia Ahrenkilde-Hansen told a news conference.

Chancellor Angela Merkel, leader of EU paymaster Germany, said Greece must more aggressively privatize state-run firms and boost tax revenues. She said the confidence vote was an important step but Greece must now push through the reforms European Central Bank President Jean-Claude Trichet, head of a new financial super-watchdog, said warning lights were flashing red on the euro zone debt crisis. "The message . is that it is the most serious threat to financial stability," he said in Frankfurt.

Worryingly for Brussels and for markets, divisions again emerged among EU policymakers over how to involve private creditors in the next phase of the rescue, with Merkel telling lawmakers there was only limited support for Germany's position that the banks must do their bit.

Any suggestion that governments are forcing banks to help finance the bailout could be viewed by credit rating agencies as a Greek default or restructuring. That could trigger further catastrophic debt downgrades and suck in Europe's other weak economies.

CABINET APPROVES REFORMS

The Greek cabinet on Wednesday approved draft legislation spelling out details of its new five-year austerity plan, which will now be submitted to parliament on Friday. The thousands of demonstrators chanting their anger on Tuesday night during the confidence vote illustrated widespread public opposition and the big challenges still facing the government.

Papandreou aims to get parliamentary approval for the package of spending cuts, tax hikes and state asset sales by June 28, and to implement it by July 3, to secure 12 billion euros ($17 billion) in funding from the European Union and IMF.

Without the aid, Athens will plunge into default next month, sending shock waves through the global financial system.

Urging the cabinet to approve the draft, Papandreou told them: "We are in a continuous, tough negotiation with our partners ... the international environment is tough. It is unstable and often nervous."

But Slovak Prime Minister Iveta Radicova said Greece would struggle to pass the measures by the end of June. "I am afraid that, in the conditions as they are set today, it will be hardly possible to pass in the Greek parliament," she told reporters.

EU leaders meeting in Brussels on Thursday and Friday will discuss the next steps in supporting Greece although Merkel said she expected no concrete decision on more funding until Athens approved the package.

The leaders are expected to make a political commitment to go on funding Athens for the next 12 months to convince the IMF to release the next tranche of loans in early July, once the fiscal package is implemented.

The euro rose on hopes that the immediate threat of market chaos could be avoided. But the gains were short-lived as traders remained worried about politicians' will to implement harsh austerity measures against fierce resistance from the Greek public, and doubtful of Greece's ability to reduce its debt burden without some form of restructuring.

"It's not over," one trader said.

YEARS OF MISERY

A Reuters survey of European economists indicated that fellow euro zone periphery states Portugal, Ireland and Spain as well as Greece all faced years of economic misery from dismal growth and painful unemployment.

The forecast for Greece was for practically no growth next year against an IMF prediction of 1.1 percent.

The government won the late-night confidence motion by 155 to 143 with two abstentions after all of Papandreou's Socialist Party deputies voted solidly with the government, signaling they had been brought into line after earlier dissent.

But despite European and IMF calls for unity behind the reforms, all opposition deputies voted against. More than 20,000 protesters chanted insults outside parliament during the vote.

With unions bristling for a fight and much of the public outraged by new austerity measures as Greece suffers its worst recession for 37 years, implementing any reforms will be tough.

Workers at state-controlled power utility PPC continued a strike for the third day in opposition to a planned sale of part of the company. Various parts of Athens suffered brief power cuts on Wednesday."

"Within the parliament there is no problem at all, the real problem is in society," said Costas Panagopoulos of pollster ALCO. "There's a lot of disappointment in the Greek society, there's a lot of anger and there's no hope at all. The new minister of finance and the government...have to offer some hope otherwise I cannot see how the government could remain stable."

The new mid-term plan envisions raising 50 billion euros by selling off state firms and includes 6.5 billion in 2011 fiscal consolidation, almost doubling existing measures that have helped extend a deep recession into its third year.

Most analysts remain skeptical that Greece will be able to repay its vast public debt pile of 340 billion euros, 1.5 times its annual economic output and more than 30,000 euros for each of its 11.3 million people, even if the reforms are implemented.

Mohamed El-Erian, head of Pimco, the world's biggest bond fund, said he expected Greece to end up defaulting on its debt.

"For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default," he said.

But for now both markets and European policymakers are willing to give Greece the benefit of the doubt.

"Although this clearly is not going to be a long-term fix, investors see this as a chance that the can will be kicked further down the road," said David Dietze, Chief Investment strategist at Point View Financial Services.

New Finance Minister Evangelos Venizelos, in an attempt to answer a key grievance of protesters, told parliament the government's top priority would be to build a fairer tax system.

He is expected to drop plans for an increase in fuel tax and for a special levy on real estate, instead targeting the self-employed -- who are widely believed to be amongst the worst tax evaders -- while lowering the burden on low-paid employees.

Euro zone officials have told Reuters the plan for the new bailout, meant to extend Greece's year-old 110-billion-euro deal and fund it into late 2014, would feature up to 60 billion euros of fresh official loans, 30 billion euros from the private sector and 30 billion euros from privatizations.

(Additional reporting by Renee Maltezou, Lefteris Papadimas in Athens, John O'Donnell in Brussels and Faith Hung in Taipei; Writing by Barry Moody; Editing by Janet McBride)