Vote Calms Markets—for Now

The Wall Street Journal

ATHENS—Financial markets breathed a sigh of relief Wednesday after the Greek Parliament approved a five-year austerity plan demanded by international creditors, but investors remain wary that the fix fails to resolve problems facing Greece—and Europe—in the long run.

The measures, which were demanded by international creditors as a condition of a new bailout, eased fears of an imminent default, but market reaction was muted by gains over the past two days, partly on expectations the budget-cutting package would pass.

The Dow industrials ended the day 72.73 higher at 12261.42, capping their biggest three-day winning streak since late March. The Stoxx Europe index jumped 1.7% at 269.8, and London's FTSE 100 index gained 1.5% to 5855.9. Asian markets opened mixed on Thursday, with Japan's Nikkei average unchanged.

The euro climbed to better than $1.44 against the U.S. dollar, though still well below its peak this year near $1.50.

Greek bond yields, which move in the opposite direction of price, fell a bit. But Greek bond prices still suggest investors are expecting a default, a reflection of the continued doubts about the region.

"We are under no illusion that we have a resolution to Greece's insolvency," said Andrew Lim, an analyst at Espirito Santo investment bank in London.

Bonds of other cash-strapped euro members also strengthened, reflecting investors' confidence that the euro crisis won't spread in the near term. The yield on Spanish 10-year government bonds dropped to 5.56% on Wednesday afternoon, compared with nearly 5.7% on Monday.

U.S. Treasuries fell, as investors who had sought refuge in safe U.S. bonds shifted back to riskier investments. "At least for the time being, the threat of a Greek-related implosion has abated and therefore the safe-haven bid has waned somewhat," said Ward McCarthy, chief financial economist within the fixed-income group at Jefferies & Co.

European finance ministers meet on Sunday in Brussels to piece together Greece's next bailout deal. High on their agenda: How to get banks and other investors in Greek bonds to contribute to the rescue effort by agreeing to reinvest some of their maturing debt into new Greek bonds.

Wednesday's measures, which passed with a five-vote margin, followed an intense debate within the ruling party and Greek society at large on whether the country can bear further austerity. Even with the new spending cuts and promised bailout funds, the fate of the country beyond the summer, and of the debt crisis around the euro zone's fringe, remains open. Doubts about Greece's solvency and its ability to maintain tough austerity policies remain as widespread in financial markets as they are on the tear-gas-filled streets of this city.

Mounting economic misery in Greece is challenging the ability of its politicians to continue governing, say analysts and Greek officials. Many observers here predict political instability by the fall.

Thousands of protesters outside the Greek Parliament loudly booed the outcome of Wednesday's vote on the austerity package. The demonstrations turned into running street battles between police and stone-throwing youths. By midafternoon, the smell of tear gas wafted over large swaths of Athens.

Greek ruling-party lawmaker Alexandros Athanassiadis—who voted for the austerity plan after saying he wouldn't—was attacked by a small group of protesters who threw objects at him as he walked through central Athens. He suffered minor injuries. In the evening, a protester threw a Molotov cocktail into the post office below the finance ministry, but the fire was quickly extinguished.

The European Union and the International Monetary Fund had required Greek lawmakers to pass the additional €28.4 billion ($40.81 billion) in spending cuts and tax increases before releasing Greece's next aid payment under the country's €110 billion bailout launched last year.

Approval of the cuts, and of a €50 billion privatization program, is also a condition of the EU-IMF agreement to a second bailout program, expected to be valued at about €100 billion, that will finance Greece through 2014.

That second package of rescue loans also depends on reaching an agreement between euro-zone governments and banks on a way to make banks share the burden of funding Greece.

Greece's finances could still unravel as early as September, by which time the country must hit strenuous targets for reducing its budget deficits and implementing the agreed fiscal measures to obtain the next slice of its EU-IMF aid. Greek politicians are under rising public pressure to renegotiate at least parts of their tough bailout program, to give relief to the economy. So far, Athens' pleas for easier terms have fallen on deaf ears in Europe.

Wednesday's vote in Parliament is a short-term victory for embattled Prime Minister George Papandreou, who fought hard to make sure his Socialist party's wavering lawmakers voted the government line. The ruling party holds 155 of the 300 seats in parliament.

"We have to do anything necessary to avoid the country collapsing," Mr. Papandreou told lawmakers just before the vote. Failure to approve the new budget cuts would cause the country to run out of money, and there was "no plan B," he warned. The measures were approved with only one defection from the governing party's ranks.

European finance ministers' target for banks' contribution is €30 billion, but it remains to be seen how close they can get to the number. The main proposal on the table, from French banks, calls for a voluntary rollover into new 30-year bonds backed by some international guarantees. German banks have been cautious about the French idea, but signaled some progress toward an agreement on Wednesday. Deutsche Bank AG Chief Executive Josef Ackermann said he is confident banks will "offer a hand" to European governments.

Greece faces another critical test Thursday, when Parliament is to hold a further vote on implementing the details of the austerity plan, as well as the privatization program. They are also expected to pass.

—Matt Phillips contributed