Greek government votes for second austerity law
The Greek parliament approved detailed austerity and privatisation bills on Thursday in a crucial vote to secure emergency funds and avert imminent bankruptcy, but longer-term dangers still lurk.
Prime Minister George Papandreou secured a majority for the legislation after lawmakers backed a 28 billion five-year euro austerity plan on Wednesday, clearing the last obstacle to the next slice of aid from the European Union and the International Monetary Fund.
The euro (EUR-) and global stocks rose to three-week highs in anticipation of the vote as investors expressed relief that the spectre of a sudden summer default had been avoided, despite fierce public opposition to more pay and spending cuts.
Belgian Finance Minister Didier Reynders said euro zone finance ministers were likely to agree as a result to release a next tranche of loans to Greece at a meeting on Sunday. The IMF is set to follow suit on July 5.
That 12 billion euro loan will prevent Greece defaulting in mid-July or at the latest on Aug. 20, when it must honour a big bond redemption, and shift the focus to a second assistance package likely to be about the same size as last year's 110 billion euro bailout.
But credit insurance markets are still pricing in an 80 percent chance of Greece defaulting on its 340 billion euro debt mountain—150 percent of annual economic output—within five years, and a likely 40 percent write-down for bondholders on three-year debt.
In Berlin, Finance Minister Wolfgang Schaeuble said he had reached agreement with German banks and he expected a euro zone deal on Sunday on private sector participation in a new assistance programme, based on a French plan for a voluntary debt rollover.
German institutes were likely to contribute 3.2 billion euros through this scheme—barely one-tenth of the sum sought from private bondholders. French banks and insurers have the biggest exposure among foreign holders of Greek debt. Greek banks have little choice but to roll over their holdings.
Prime Minister George Papandreou's socialist government may find it hard to enforce tax increases and state asset sales against massive public resistance, while a violent fringe always present in Greek politics has burst to the fore.
Vasso Papandreou, a former European Commissioner and rebel member of the prime minister's PASOK party who is not related to him, told parliament she would vote for the laws as a patriotic duty even though she believed the economy would deteriorate as a result.
"Germany is preparing the ground for our official bankruptcy as soon as this can happen without cost to the German banks," she said, venting a feeling widely shared among Greeks, who say they are suffering to save European bankers.
Rioters armed with stones and clubs fought several hours of running battles with police firing huge clouds of teargas in central Athens until the early hours of the morning, leaving gutted shop-fronts, shattered windows and a field of debris.
"The problem for Papandreou is not in parliament," said Costas Panagopoulos, head of ALCO pollsters. "It is what is happening outside parliament: not in Syntagma Square, which is just a few hundred protesters, but with the whole of Greece's 11 million people."
North European creditor countries, led by chief paymaster Germany, are insisting that private sector bondholders must share the cost of any further rescue, so intensive talks are under way on a "voluntary" rollover of maturing Greek debt.
European Central Bank President Jean-Claude Trichet, who has repeatedly warned the EU against triggering a devastating credit event or downgrade of Greek debt to default, sounded a note of caution on the French proposal in testimony in the European Parliament.
"At this stage we have not yet (got) a position... we are very alert but I cannot give you a precise judgment on what is going on. There are several concepts being examined," he said. "We advise against all concepts that are not purely voluntary."
Three banking sources told Reuters on Wednesday that politicians and bankers were confident that implementing the French plan would not trigger a payout of credit insurance or a default that would inflict losses on banks.
Banks had received positive signals from ratings agencies that they would not call the rollover plan a default, the sources said.
But officials cautioned that many details of the plan, including whether there would be any official guarantee, remained to be negotiated.
Many investors and economists still expect Greece to default in the medium-term, and one influential international official suggested on Thursday that might be better for Athens.
"The current state of affairs where all the Greek taxpayer's money goes to the creditors cannot continue," said Angel Gurria, head of the Organisation for Economic Cooperation and Development, a rich nations' intergovernmental think-tank.
"Greece must be enabled to have a policy that really allows work on the economy's recovery. This is also best for the creditors," Gurria told Dutch daily Het Financieele Dagblad. He did not rule out a "haircut" for Greek debt holders.
As Athens recovered from a night of violence, market concerns shifted from the danger of an immediate disorderly default for the first time in the euro zone to the medium-term prospect of a Greek debt restructuring.
"There's still implementation risk over the next few months but for now the default risk has been taken off the table so long as today's vote goes through," said Lloyds Bank strategist Eric Wand.
He forecast renewed pressure on the bonds of weaker euro zone countries on the edges of the single currency area after a temporary respite.
"There should be a brief hiatus in the periphery-bashing we've had in the last few weeks, but there are other problems."
Those included the prospect of early Spanish elections and squabbling within Italy's centre-right coalition as the country faces a credit rating downgrade.
Italy's cabinet is due to adopt on Thursday a more ambitious deficit reduction plan than initially planned aimed at saving 47 billion euros by 2014 to try to ward off a loss of creditworthiness.
But Prime Minister Silvio Berlusconi's Northern League coalition partners have said the government is at risk over plans to raise the retirement age and cut spending.