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)
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