Greek lawmakers seen backing austerity, future unsure

29-6-2011

(Reuters) - Greece's parliament looked increasingly likely to approve unpopular austerity measures on Wednesday, despite violent protests, to secure international funds to prevent the euro zone's first sovereign default.

But with the country on the brink of bankruptcy, it remains uncertain whether a weakened Socialist government can push through laws to implement structural reforms and privatizations in a second series of votes on Thursday, and then stick to a tight EU/IMF-imposed schedule for implementation.

Many economists and investors still expect Greece to default in the medium-term.

Prospects of a "yes" vote on the five-year austerity plan rose when one of three rebels in Prime Minister George Papandreou's governing PASOK party changed heart and said he would vote for the measures out of a sense of national duty.

"I have made the decision to vote for the plan because national interests are more important than our own dignity," Thomas Robopoulos, the deputy, told Reuters.

PASOK holds 155 seats in the 300-member chamber and may also be helped in the vote, expected between 1100 and 1400 GMT, by a small center-right splinter group of five deputies led by former foreign minister Dora Bakoyanis.

Bakoyanis, who has been intensely lobbied by European Union officials, said she would abstain and the other four members were free to vote according to their conscience.

Rising expectations of 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.

European shares gained for a third straight day on Wednesday, led by bank stocks, as investors bet parliament would pass the plan.

"A lot of work has been done behind the scenes to ensure the proposals get passed, and that optimism is getting reflected in the share prices," said Graham Bishop, equity strategist at RBS in London.

"The passage of the austerity plan will certainly help, but that's not to say there are not any more hurdles. The next hurdle will be the implementation of the measures, and the government will be closely watched on that," he said.

DEBRIS

Sporadic clashes between several hundred hooded youths throwing stones and wielding clubs and riot police firing tear gas continued until late into the night in central Athens.

Workers cleared debris of smashed shop windows and burned garbage cans used as makeshift barricades around Syntagma Square, outside parliament, where several hundred people had already gathered to hold fresh protests on Wednesday.

Despite a threat by trade unions staging a 48-hour general strike to prevent lawmakers entering the colonnaded parliament building, there was no impediment to access as debate began on the austerity program, witnesses said.

The EU and the International Monetary Fund have said Greece must adopt the austerity plan, with 28.6 billion euros ($40 billion) in savings, and the implementation measures to receive the next 12 billion euro slice of emergency loans by mid-July.

Without them, Athens would run out of cash within weeks.

"For parliament to vote against this package would be a crime," Greece's central bank governor, George Provopoulos, was quoted as saying in the Financial Times on Wednesday. "The country would be voting for its suicide."

Risk premiums on lower-rated euro zone government debt fell on news that German banks had agreed in principle to use a French proposal as a basis for negotiating private-sector participation in a Greek financial rescue.

NO PLAN B

The EU and IMF bailed out Greece with a 110 billion euro deal in May last year and 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.

The EU's top economic official, Olli Rehn, stressed that any further financial assistance for Greece hinged on parliament adopting the austerity package.

"The only way to avoid immediate default is for parliament to endorse the revised economic program ... They must be approved if the next tranche of financial assistance is to be released," he said in a statement.

"There is no Plan B to avoid default," Rehn said, dismissing widespread reports that Brussels was working on a fallback plan to keep Greece afloat.

Newly appointed IMF chief Christine Lagarde called on Greek lawmakers to join together in supporting the austerity plan, although Greece's Conservative opposition leader Antonis Samaras reiterated his objections.

"This policy is wrong, it has exhausted the Greek people and Greek society," Samaras told parliament. "If we perpetuate this mistaken policy we will only make things worse, both for Greece and for Europe."

If Greece approves the legislation, euro zone finance ministers meeting in Brussels on Sunday are likely to agree to release 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 privatization revenues and an expected 55 billion euros in new official funding.

Euro zone banks and insurers are considering a French plan outlined by President Nicolas Sarkozy on Monday 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 GDP growth rate.

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

France had the largest foreign private-sector exposure to Greece at more than $56 billion, followed by Germany, at end 2010, data from the Bank for International Settlements shows.

Two sources close to the negotiations told Reuters that German banks had agreed to use the "French model" as a basis for talks with the German Finance Ministry on Thursday. German Deputy Finance Minister Joerg Asmussen also called the French plan a good basis for discussions.