Greece says will stay the course, despite GDP slump (Reuters)

THESSALONIKI, Greece (Reuters) – Debt-laden Greece's government vowed on Saturday to stay the course of austerity, sending a message to its increasingly frustrated lenders it will do everything it takes to avoid a bankruptcy that would rock the euro.

Anger at the country's failure to meet fiscal targets under its EU/IMF bailout has reached boiling point, prompting senior euro zone policymakers to cast doubt on its ability to avoid default or even membership of the single currency.

But Finance Minister Evangelos Venizelos countered the talk, telling its lenders his government remained fully committed to its bailout plan.

"We are absolutely determined, without weighing any political cost, to fully meet our obligations to our institutional partners," he said in a speech in the northern city of Thessaloniki.

Venizelos pledged to further cut the civil service payroll, push privatizations and deepen labor market reform.

"If these things don't change, we won't survive, we won't get out of the crisis," he told business people in a conference.

Civil servants, who have already seen about a fifth of their wages slashed, will suffer more after the government decided to put thousands of them in a so-called "Labour Reserve," in which they will draw 60 percent of their salary and possibly face dismissal if they find no other public sector job within a year.

"We must prove wrong all those who say that Greece is incapable, or unwilling, or a pariah, or doesn't deserve to be in the euro," Venizelos said.

But austerity measures are throwing the economy into an ever deeper recession. GDP will shrink by more than 5 percent this year, Venizelos said, topping earlier projections in its third straight year of contraction.

PUBLIC DISCONTENT

Recession is breeding public discontent and thousands of disgruntled civil servants, students, taxi drivers, and even football fans, are expected to march later on Saturday in Thessaloniki.

The protests are scheduled to coincide with a major economic policy speech by Prime Minister George Papandreou at the Thessaloniki Trade Fair, the country's biggest economic event.

Taxi drivers have called a 24-hour strike. Thessaloniki restaurant owners said they would shut down on Saturday to protest a VAT hike that took effect earlier this month.

"We are suffering an unprecedented tax raid... we deeply worry about tomorrow," George Kasimatis, Chairman of Greece's Chamber of Commerce Federation, told Venizelos during the conference.

Police presence is felt throughout the city, with about 6,000 officers patrolling the streets on foot or motorbike. Three people were detained for carrying face masks.

Papandreou, who was heckled by protesting labor unionists in Thessaloniki on Friday, avoided walking through the fairgrounds in the morning, as prime ministers usually do on the event's first day.

While vowing to keep its side of the bargain, the Greek government sharply criticized its EU partners for delaying ratification of a second, 109-billion-euro bailout for the country, agreed by euro zone leaders on July 21.

"Europe must rise to the challenge and move toward implementing the July 21 decisions, to put an end to the Sissyphean ordeal the Greek people is going through," said Development Minister Mihalis Chrysohoidis.

"Doing nothing is disastrous for all of us," he added.

A G7 source said the troika (EU/IMF/ECB), which suspended talks with Athens last week in frustration at Greece's struggle to stick to its deficit reduction plan, would probably come up with a form of words in its next report to allow the next tranche of bailout funds to be paid.

But the working assumption is now that Greece will not avoid default indefinitely.

However, a bond swap plan for private bondholders, which is part of the second bailout plan and is supposed to ease Greece's debt payments was progressing well, Venizelos said.

"The private sector is responding very well to the PSI (private sector involvement)," he said without elaborating, one day after an initial deadline for banks to express interest in the scheme expired.

(Additional reporting by Yannis Behrakis; Editing by Toby Chopra)

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Ford profits despite economy, rising costs (Reuters)

DEARBORN, Michigan (Reuters) – Ford Motor Co's profit held up well in a second quarter marked by the impact of Japan's earthquake, the shaky U.S. economy and high commodity costs, but the automaker remained cautious about consumer demand going forward.

Ford, the only U.S. automaker that did not accept a government bailout in 2009, has posted a net profit for eight straight quarters. It racked up net losses of $30 billion from 2006 through 2008 when it cut jobs, sold unprofitable brands and reshaped a lineup laden with large SUVs and pickup trucks.

"These results are pretty good considering some of the stumbling blocks in the economy," said Mirko Mikelic, senior portfolio manager with Fifth Third Asset Management, which owns Ford shares.

"Even after we came out of the recession, this is still a fragile recovery," he added. "It's really tied to employment and the housing market."

However, Ford, scheduled to begin talks on Friday with the United Auto Workers union for a new labor deal, also said it expects U.S. industry sales this year to finish at the low end of its previous forecast.

Ford shares were down 1.5 percent at $12.97 on Tuesday afternoon, after rising as much as 2 percent in the morning. The S&P 500 index at the same time was down 0.3 percent.

Smaller rival Chrysler also reported on Tuesday, posting a wider second-quarter net loss after the U.S. automaker repaid $7.6 billion in debt stemming from its 2009 federal bailout.

North America was the only region where Ford's profit improved but pricing rose in every region, helping to offset higher commodity costs. North America was particularly strong, with higher prices for vehicles accounting for $900 million in gains, almost evenly split between higher prices and lower incentives.

"While pricing has been a positive story for Ford for much of this cycle, the pricing gains have accelerated despite heightened incentives at selected Korean manufacturers," Jefferies analyst Peter Nesvold said in a research note.

He said the auto business saw pricing rise $1.1 billion over last year, almost double his estimate.

Ford's net income in the second quarter fell to $2.4 billion, or 59 cents per share, from $2.6 billion or 61 cents per share as it reduced debt by $2.6 billion to $14 billion.

Lowering debt saved Ford $700 million in interest payments in the first half of 2011 compared with the same period in 2010.

In North America, Ford's pretax profit for the second quarter rose 0.5 percent to $1.91 billion.

"They're doing a great job holding (market share)," said Citi analyst Itay Michaeli. "That's why you're seeing a quarter like this, where they're realizing $900 million in positive pricing on a year over year basis in North America. We were expecting $700 million."

Excluding one-time items, Ford's quarterly profit of 65 cents per share was 5 cents better than what analysts polled by Thomson Reuters I/B/E/S had expected.

Revenue rose 13 percent to $35.5 billion. Analysts had expected $31.6 billion.

"In contrast to the earnings and guidance volatility seen to date this automotive earnings season, Ford delivered a quarter that was, like some of its cars over the years, boring but reliable -- and we mean that as a compliment," Barclays Capital analyst Brian Johnson said in a research note.

Ford Chief Financial Officer Lewis Booth told reporters. "This wasn't the easiest of quarters. We've gotten through the Japanese tsunami issues very well. We lost some units (vehicle production) in Asia Pacific, but managed to lose a lot less than we expected and we didn't really lose any significant units anywhere else in the world."

However, Booth added Ford now sees U.S. sales for the full year at the bottom end of its previous forecast of 13 million to 13.5 million vehicles. Earlier in the year, Ford had expected the higher end of the range.

Ford's forecast includes medium and heavy trucks, which account for 250,000 to 300,000 in annual sales.

The shift in outlook echoed comments previously made by rival General Motors Co and comes after disappointing U.S. industry sales in May and June.

Booth reiterated comments that Ford expects the second half of 2011 to show weaker financial results than the first half, in part because of seasonal factors.

INVESTMENT GRADE PROGRESS

Ford is striving to return to an investment grade rating by the major ratings agencies. Booth said he could not predict when the company might return to investment grade, but expects that to occur "sooner rather than later."

Most major agencies have Ford rated two notches below investment grade. Ford was last at investment grade in May 2005.

However, Booth said he expected a reexamination by the agencies once talks for a new labor deal with the UAW are completed. The union represents about 41,000 Ford hourly workers. [ID:nN1E76N0DA]

Ford's hourly "all-in" labor cost per worker is about $58, compared with about $50-$51 per hour for Chrysler and about $57 per hour at GM.

The gap between Ford and its Japanese rivals with U.S. plants has narrowed from about $25 to $30 in 2007 to about $5 to $10 now, according to the Center for Automotive Research of Ann Arbor, Michigan.

Ford's labor costs are higher than Chrysler mainly because it has hired fewer than 100 so-called second-tier workers who make about half the pay of veteran UAW-represented workers, while about 12 percent of Chrysler's 22,800 union auto workers make the lesser wage.

The Center for Automotive Research also said Ford's estimated U.S. auto production labor costs are about $5.1 billion annually.

Booth said Ford's profit was hampered by higher commodity costs related mainly to higher oil prices. He said prices for plastics, steel, aluminum, cooper and precious metals are all on the rise and affecting profit margins.

"As we continue to see growth in Asia, commodities stay under pressure," he said.

In its home U.S. market, the No. 2 U.S. automaker had a 16.9 percent market share through the first half of this year, compared with 17 percent a year ago.

"We continue to expect commodities and structural costs to each increase by about $2 billion compared with 2010," Booth said.

He said the higher structural costs are linked to product development, a key for Ford's business plan, and that as a percentage of net revenue those costs will be less than in 2010.

Ford's sales in the first half of the year rose 12 percent versus a 17 percent rise for GM and 20 percent for Chrysler Group LLC.

(Additional reporting by Ben Klayman; Editing by Derek Caney and Matthew Lewis)

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Texas executes Mexican despite White House plea (AP)

HUNTSVILLE, Texas – The U.S. Supreme Court refused to block Texas from executing a Mexican citizen despite a White House-backed appeal that claimed the case could affect other foreigners arrested in the U.S. and Americans in legal trouble abroad.

Humberto Leal was executed Thursday evening for the 1994 rape and murder of a San Antonio teenager after his attorneys, supported also by the Mexican government and other diplomats, unsuccessfully sought a stay. They argued that Leal was denied help from his home country that could have helped him avoid the death penalty.

From the death chamber, Leal repeatedly apologized and then shouted "Viva Mexico!" as the lethal drugs began taking effect. The 38-year-old mechanic was sentenced to death for killing 16-year-old Adria Sauceda, whose brutalized nude body was found hours after the two left a street party.

Leal was just a toddler when he and his family moved to the U.S. from Monterrey, Mexico, but his citizenship became a key element of his attorneys' appeals. They said police never told him following his arrest that he could seek legal assistance from the Mexican government under an international treaty.

Mexico's government, President Barack Obama's administration and others wanted the Supreme Court to stay the execution to allow Congress time to consider legislation that would require court reviews for condemned foreign nationals who aren't offered the help of their consulates. The high court rejected the request 5-4.

But questions remain over how Leal's execution may affect relations between Mexico and the U.S. — and Texas, the country's busiest death penalty state that shares a roughly 1,250-mile border with Mexico.

Leal's relatives who gathered in Guadalupe, Mexico, burned a T-shirt with an image of the American flag as a sign of protest. Leal's uncle, Alberto Rodriguez, criticized the U.S. justice system and the Mexican government, saying "there is a God who makes us all pay."

Mexico's foreign ministry said in a statement that the government condemned Leal's execution and sent a note of protest to the U.S. State Department. The ministry said Mexican ambassador Arturo Sarukhan attempted to contact Texas Gov. Rick Perry, who refused to speak on the phone.

The governor's office declined to comment on the execution Thursday.

Relatives said Leal would be buried in a cemetery next to his grandmother in Monterrey, Mexico, as he requested.

"I have hurt a lot of people," Leal said during his final minutes Thursday. "I take full blame for everything. I am sorry for what I did."

"One more thing," he said, then twice shouted "Viva Mexico!" He told the prison warden he was ready, adding "let's get this show on the road."

He grunted, snored several times and appeared to go to sleep. He was pronounced dead at 6:21 p.m., 10 minutes after the lethal drugs began flowing into his arms.

In denying his attorneys' appeal, the Supreme Court's five more conservative justices doubted that executing Leal would cause grave international consequences. "Our task is to rule on what the law is, not what it might eventually be," the majority said.

The court's four liberal-leaning justices said they would have granted the stay.

Leal's attorney Sandra L. Babcock said that with consular help her client could have shown that he was not guilty. But, she said, "this case was not just about one Mexican national on death row in Texas.

"The execution of Mr. Leal violates the United States' treaty commitments, threatens the nation's foreign policy interests, and undermines the safety of all Americans abroad."

Prosecutors said Congress was unlikely to pass the legislation and Leal's appeals were simply an attempt to evade justice for a gruesome murder.

Leal's argument that he should have received consular legal aid wasn't new — Texas has executed other condemned foreign nationals who raised similar challenges, most recently in 2008.

Leal's appeals, however, focused on legislation introduced last month in the U.S. Senate by Vermont Democrat Patrick Leahy. The bill would bring the U.S. into compliance with the Vienna Convention on Consular Relations provision regarding the arrests of foreign nationals. It would ensure court reviews for condemned foreigners to determine if a lack of consular help made a significant difference in the outcome of their cases.

"Americans detained overseas rely on their access to U.S. consulates every day," Leahy said after the Supreme Court decision was announced. "If we expect other countries to abide by the treaties they join, the United States must also honor its obligations."

The Obama administration took the unusual step of intervening in a state murder case last week when Solicitor General Donald Verrilli Jr. joined Leal's appeal, asking the high court to halt the execution and give Congress at least six months to consider Leahy's bill.

The Mexican government and other diplomats also contended that Leal's case needed to be thoroughly reviewed. Some warned his execution would violate the treaty provision and could endanger Americans in countries that deny them consular help.

Measures similar to Leahy's have failed at least twice in recent congressional sessions. The Texas Attorney General's office, opposing the appeals, pointed to those failures in its Supreme Court arguments and said "legislative relief was not likely to be forthcoming."

Stephen Hoffman, an assistant attorney general, said evidence against Leal was strong.

"At this point, it is clear that Leal is attempting to avoid execution by overwhelming the state and the courts with as many meritless lawsuits and motions as humanly possible," Hoffman said.

Prosecutors said Sauceda was drunk and high on cocaine the night she was killed, and that Leal offered to take her home. Witnesses said Leal drove off with her around 5 a.m. Some partygoers found her body later that morning and called police. There was evidence Sauceda had been bitten, strangled and raped, and bludgeoned with a large chunk of asphalt.

A witness testified that Leal's brother appeared at the party, agitated that Leal had arrived home bloody and saying he had killed a girl.

In his first statement to police, Leal said Sauceda bolted from his car and ran off. After he was told his brother had given detectives a statement, he changed his story, saying Sauceda attacked him and fell to the ground after he fought back. He said when he couldn't wake her and saw bubbles in her nose, he got scared and went home.

Testifying during his trial's punishment phase, Leal acknowledged being intoxicated and doing wrong but said he wasn't responsible for what prosecutors alleged. A psychiatrist testified Leal suffered from alcohol dependence and pathological intoxication.

Sauceda's mother, Rachel Terry, told San Antonio television station KSAT her family already had suffered too long.

"A technicality doesn't give anyone a right to come to this country and rape, torture and murder anyone," she said.

In 2005, President George W. Bush agreed with an International Court of Justice ruling that Leal and 50 other Mexican-born inmates nationwide should be entitled to new hearings in U.S. courts to determine if their consular rights were violated. The Supreme Court later overruled Bush.

___

Associated Press Writers Jesse J. Holland in Washington and Porfirio Ibarra in Monterrey, Mexico, contributed to this report.

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Recession hits transit budgets despite rising need (AP)

BOSTON – Cash-strapped and debt-ridden, public transit systems across the nation are trimming service, raising fares and postponing badly needed upgrades just to maintain daily operations, even as rising gas prices increase demand and experts call modernization critical to cities' futures.

The economic downturn and cuts in government support have forced transit agencies to pare down, complicating the daily lives of commuters who depend on trains, trolleys and buses. Frustration comes easily.

"I can't rely on it at all," said Frank Summers, who has been commuting to Boston from suburban Ashland on commuter rail for about seven years and believes service is declining. "It's always jammed-packed and rarely on time."

The trains, operated by a company under contract with the Massachusetts Bay Transportation Authority — a network that includes the nation's oldest subway and is known to Bostonians simply as the T — were plagued by equipment problems during the past winter.

The fleet of 80 aging locomotives had, among other woes, trouble starting, keeping auxiliary power functioning for lighting systems and maintaining enough air pressure for braking systems, according to transit officials.

On one cold February night, a commuter train bound for Worcester broke down outside Boston, transforming passengers' usual 80-minute commute into a four-hour nightmare.

The T bought two new commuter rail locomotives this year — the first new ones in 20 years — and is pledging to continue efforts to modernize the line. But financial struggles are hardly unique to Boston or other big cities, and are reflective of the vast majority of transit systems large and small.

By one survey, more than 80 percent of U.S. transit systems had cut service, raised fares or both since the economic downturn started. The Federal Transit Administration has pointed to tens of billions of dollars in deferred maintenance nationwide, a problem particularly acute for older urban systems.

William Millar, president of the Association of Public Transportation Agencies, said that there are signs of financial improvement, but that it's not enough to make up for the needs.

"We still have a significant majority of systems that are still running unfunded deficits, that are still going to have to consider further fare increases and further service cuts, though they certainly don't want to do those things," he said.

Especially when ridership is growing. In Boston, for example, May was the busiest month on record for the T's subway system, and overall ridership is up more than 5 percent from a year ago.

"Almost universally, across the political spectrum, people are saying rising gas prices are making them nervous, that they really want to have more and better transit options," said David Goldberg, communications director for Transportation for America, a coalition representing the interests of transit users.

More riders represent a mixed bag for operators. Fare revenue goes up, of course, but the gains can easily be offset by the higher fuel costs that systems must incur.

An influx of riders also might generate greater political support for mass transit, but the added strain on aging and overtaxed equipment could frustrate commuters and leave them ready to return to their cars when gas prices ease.

A 2009 FTA study that examined the "state of good repair" of the nation's seven largest rail transit agencies — New York, Boston, Philadelphia, Washington, D.C., Chicago, San Francisco and the New Jersey Transit System — found anything but good repair.

The report found that 35 percent of all rail assets of those agencies were in subpar condition. Another 35 percent were deemed adequate and only 30 percent were in good or excellent condition. Upgrades would cost the seven largest systems $50 billion, the agency estimated.

Add in the rest of the country's public transit systems, and the maintenance backlog mushrooms to $78 billion.

Millar's group surveyed its 1,500 agencies and found that at least 40 percent were delaying capital improvements.

"The problem is to try to keep fares to a reasonable level, to try to keep services at a reasonable level, they have had to let some maintenance practices slip," he said. "Of course they are concerned about safety, so they try hard not to defer anything of a major safety need."

It's not just the major systems that are being forced to scrimp.

The Transit Authority of River City, which provides bus service for five counties in the greater Louisville, Ky., region, laid off 42 operators and mechanics last year and 10 administrative employees the previous year.

The authority's executive director, J. Barry Barker, said the system also was forced to reduce service and raise fares by $1 to $2.50 for express buses. Preventing further cuts or steeper fare hikes has meant sacrificing some improvements.

"The feds have a guideline that you can replace a full-size, 40-foot bus every 12 years. Basically I don't know anybody in the business who is replacing them after 12 years, and it's typically 14-16 (years)," he said.

Over the past several years, the authority has purchased only about half the replacement buses needed to meet even the longer cycle.

Federal support for mass transit comes largely in the form of the gasoline tax, with 2.86 cents per gallon of the federal tax earmarked for transit. But revenue has been declining as fewer Americans drive and many who do have switched to more fuel-efficient vehicles.

Federal funding also has strings attached.

Transit systems in larger cities can apply it only toward capital improvements, while systems in areas with populations of 200,000 or less can use federal money to pay operating expenses. Federal stimulus money, now ending, provided a short-term boost with 1,072 grants worth $8.8 billion for special transit projects. That included the purchase of new buses and rail cars, according to the Federal Transit Administration.

Going to the ballot box has become a popular tool for systems trying to raise revenue, and voters have generally seemed receptive.

In 2010, voters nationwide approved 73 percent of transportation-related ballot questions, many calling for increases in sales or property taxes.

St. Joseph, Mo., boasts of having one the nation's oldest public transit systems, dating to when horses pulled large coaches before the Civil War. But with revenue falling and costs increasing for fuel, health insurance and liability coverage, the system had to go to local voters for a one-quarter cent sales tax increase in 2008 to avoid shutting down some of its eight bus routes.

But it may be only a temporary patch.

"We raised our sales tax, but the people haven't been buying as much stuff. It's not producing the revenue we would have hoped," said Andrew Clements, assistant director for St. Joseph public works. "As the future looms, eight to 10 years from now, we may be looking at a much harder challenge."

The public transit system serving Grand Rapids, Mich., won voter approval of property tax measures in 2000, 2003 and 2007 — allowing it to expand from 63 buses in 1999 to 105 buses this year at peak hours and more than double its ridership, said Peter Varga, chief executive officer of The Rapid.

The agency hasn't run a deficit in a decade, nor has it increased fares or cut service, he said, even as Michigan's economy has tanked.

The financial crunch has prompted creative approaches to generate additional money for transit systems.

To help close a projected $127 million operating deficit, the Boston-area system adopted a plan to sell bonds secured by future parking revenue at nearly 100 lots and garages. Proceeds from the bond would also be used to pay off future debt. The agency also hoped to sell more advertising space at stations and on trains and buses, and move its unionized employees to a more flexible state-run health insurance plan.

Passengers no longer will get a free ride if their bus or train is more than a half-hour late, but fare hikes, for now at least, are off the table.

Historically, fares have accounted for 30 percent to 40 percent of total transit revenue nationwide.

Experts who point to more modern and reliable systems around the world say U.S. cities must find ways to overcome financial hurdles and invest in public transit.

In Los Angeles, voters agreed in 2008 to pay a half-cent sales tax over the next 30 years to fund a massive expansion of public transportation. But Mayor Antonio Villaraigosa doesn't want to wait that long for the projects to be completed, so he's proposed borrowing billions from the federal government so the work can be done in just a decade.

"It's becoming clear that (cities) have to remain healthy and vital, and it's also becoming increasingly clear that a functioning transit system is a big part of that," said Robert Puentes, a transportation expert with the Brookings Institution.

___

Associated Press writers David Lieb in Jefferson City, Mo., and Russell Contreras in Boston contributed to this report.

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Greece backs austerity despite violent protests (AP)

By ELENA BECATOROS and DEREK GATOPOULOS, Associated Press Elena Becatoros And Derek Gatopoulos, Associated Press – 1?hr?15?mins?ago

ATHENS, Greece – Greece approved more austerity measures needed to avert default next month, in a vote Wednesday that calmed markets but triggered a second day of riots that left dozens injured and the capital blanketed with tear gas.

The passage of the bill was a decisive step for the country to get the next batch of bailout loans from international creditors and was met with a huge sigh of relief in markets and by Greece's partners in the eurozone. A Greek default could potentially trigger a banking crisis, particularly in Europe, and turmoil in global markets.

Another bill has to be passed Thursday for the government to secure the money.

The bill to cut spending and raise taxes by euro28 billion ($40 billion) over five years, and raise euro50 billion ($71 billion) in privatizations over the same period of time, has provoked widespread outrage, coming after a year of deep cuts that have seen public sector salaries and pensions cut and unemployment rise to above 16 percent.

While deputies voted, stun grenades echoed across the square outside the Parliament building and acrid clouds of tear gas hung in the streets. The violence continued sporadically after the vote and smoke was billowing from beneath the Finance Ministry.

Authorities and emergency services said 31 police and 15 protesters were injured and transferred to hospitals, while 30 people were detained, and 11 arrested.

Volunteer doctors said they had treated about 40 people, most with facial injuries and breathing problems, at a makeshift treatment site at a metro station next to parliament. Protesters were seen leaving the site with bandaged heads.

Head medical volunteer Flegas Stagos said more seriously wounded protesters were put onto the metro with volunteers so they could receive treatment away from the tear gas.

The European Union and International Monetary Fund have demanded both bills pass before it releases a euro12 billion installment of the country's euro110 billion ($157 billion) bailout fund. Without it, Greece was facing defaulting on its debts by the middle of next month.

Even with the installment, Greece is still in financial trouble and has been in talks with its international creditors for a second bailout, which Prime Minister George Papandreou has said will be roughly the same size as the first.

"We must avoid the country's collapse with every effort," Papandreou said before the vote. "Outside, many are protesting. Some are truly suffering, others are losing they privileges. It is their democratic right. But they and no one else must never suffer the consequences and for their families of a collapse. We must do everything so that there is no freeze in payments."

The Greek vote was greeted positively in Europe's capitals, which have been fretting about the impact of a potential Greek default both on their banking systems and on the future of the euro currency itself.

"That's really good news," German Chancellor Angela Merkel said when told of the outcome of the vote on her way out of an economic forum in Berlin. Germany is Greece's biggest creditor.

EU leaders hailed the vote as an act of "national responsibility" and urged Greek lawmakers to follow up with another positive vote Thursday.

In a joint statement, the heads of the EU commission and council, Jose Manuel Barroso and Herman Van Rompuy, said Greece had taken "a vital step back — from the very grave scenario of default" and urged a second positive vote on Thursday to allow the next batch of money to be disbursed.

"It would also allow for work to proceed rapidly on a second package of financial assistance, enabling the country to move forward and restoring hope to the Greek people," they said.

Equally, relief was the main response in markets. Soon after the vote, the euro was trading at a fairly elevated level around the $1.44 mark while stock markets around the world were posting big gains. In Greece, the main Athens stock market closed up 0.5 percent at 1,264, while the country's borrowing costs eased some 80 basis points from a morning high, with the yield on 10-year bonds settling at the still high 16.55 percent.

"The fact that the Greek parliament has passed the government's medium-term fiscal plan clearly reduces the chances of a near-term disaster," said Ben May, European economist at Capital Economics.

Even if Greece gets more bailout funds, many economists think the country will end up defaulting on its debts in some form or another. Implementing the measures is not going to be made any easier if the widespread opposition continues.

"This is bad, the country will be sold for a piece of bread," said Dimitris Kostopoulos, a 48-year-old insurer. "There were many other more appropriate alternatives to this. Parliament has once again betrayed us."

In the run-up to the vote, violence engulfed the square outside for the second day, while services across the country ground to a halt in the last day of a 48-hour general strike. Riot police fired volleys of tear gas at swarms of young men hurling rocks and other debris as well as setting fire to trash containers.

Protesters threw flares and orange and green smoke bombs, and a few sprayed fire extinguishers at police, who picked up rocks and tossed them back. Heavy clouds of tear gas wafted over the chaotic scene.

The unpopular package of spending cuts and tax hikes passed by 155 votes to 138, with five opposition deputies voted "present" — a ballot which backs neither side.

A sole deputy from the governing socialists, Panayotis Kouroublis, dissented over government plans to sell a further stake in Greece's state electricity company and was quickly expelled from the parliamentary group by Papandreou.

In a dramatic vote, socialist deputy Alexandros Athanassiadis, who had previously vowed to vote against the bill, overturned his decision at the last minute and backed the package, saying he had been swayed by the prime minister's comments in parliament.

A conservative deputy broke ranks with her party's line to also vote in favor, bolstering the government's majority of five seats in the 300-member parliament.

____

Christopher Torchia, Demetris Nellas and Menelaos Hadjicostis in Athens and Geir Moulson in Berlin contributed.

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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)

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