Greek civilian walks pass flames burning in Athens amid unrest aimed at stopping the imposition of further austerity measures designed to stave off the capitalist economic crisis. Parliament voted in favor of further measures against workers and youth., a photo by Pan-African News Wire File Photos on Flickr.
June 29, 2011, 9:26 a.m. EDT
Greek lawmakers back $112 billion austerity plan
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Greek Prime Minister George Papandreou on Wednesday secured the votes needed in parliament to approve a 78 billion euro ($112.2 billion) package of additional austerity measures and asset sales in a bid to avert a potentially devastating default, while police clashed with protesters in central Athens.
The vote moves Greece a step closer to receiving a delayed €12 billion installment of the €110 billion rescue package provided by the European Union and International Monetary Fund last year.
“We have to do anything necessary to avoid the country collapsing,” Prime Minister George Papandreou told lawmakers ahead of the vote, warning that the country would run out of money if the measures aren’t approved.
Without the funds, Greece faces a potential default as it attempts to meet coupon payments and debt obligations due in July and August.
European officials made the additional measures a prerequisite for the aid after Greece failed to meet deficit-reduction targets and it became apparent the initial rescue package would fail to put the nation on a long-term path to solvency.
Greek central bank chief George Provopoulos had warned that failure to back the austerity measures would amount to “suicide” for Greece, the Financial Times reported.
Papandreou’s PASOK party holds a five-seat majority in parliament.
Expectations the government would prevail grew Wednesday morning as formerly wavering PASOK members said they would vote “yes.”
The vote came against the backdrop of angry and sometimes violent protests. Expectations the measures would pass boosted the euro (ICAPC:EURUSD) ahead of the vote.
The shared currency saw volatile trade as voting got under way and changed hands at $1.4390 in recent action, up from $1.4366 in North American trading late Tuesday.
A vote on measures to implement the legislation is expected Thursday and could provide further snags, analysts said.
“We expect both today’s and tomorrow’s votes to get through Parliament though it will not be easy,” said Elsa Lignos, currency strategist at RBC Capital Markets in London. “The margin may be tight but we think the threat of default will ultimately swing the vote in favor of the measures. If realized, it will be a near-term positive for the euro” and risk-correlated assets.
Authorities fear a Greek default would do tremendous damage to the European banking sector and reignite turmoil in global financial markets. Read "What happens if Greece votes no on austerity."
The additional austerity measures include provisions that would lower the income-tax threshold to those earning more than €8,000 a year and impose a “solidarity tax” on persons earning more than €12,000 a year. It would also boost taxes on heating fuel for businesses, further limit civil service hiring and hike consumer and road taxes, Eurasia Group noted.
A deep recession
The measures come as earlier austerity measures weigh on the economy. Greece is struggling with a deep recession and mounting unemployment. The IMF projects the Greek economy will contract by 3% in 2011 before rebounding by 1.1% next year. Unemployment hit 16.2% in March, data showed earlier this month, up from 15.9% in February.
Approval of the measures on Wednesday and Thursday would set the stage for euro-zone finance ministers to approve the release of their share of the latest installment of Greek aid when they meet on July 3. It would also move Greece closer to receiving an additional aid package from the EU and IMF expected to total as much as €120 billion.
Meanwhile, European banks are working on proposals to roll over a portion of Greece’s maturing debt in response to calls by European governments for private bondholders to share in the cost of an additional bailout.
A plan proposed by French banks earlier this month would see private creditors reinvest some of the proceeds from maturing Greek debt holdings in a move reminiscent of the 1980s Brady bonds program credited with helping to solve the Latin American debt crisis. Read "Brady bond-style solution isn't a Greek guarantee."
But many strategists remain skeptical additional measures will be enough to allow Greece to avoid a future default or more aggressive restructuring of its existing debt obligations as it wrestles to bring down a debt pile seen near 160% of gross domestic product.
“Nobody is going to think that Greece securing another tranche of bailout money, or even securing a second bailout later, is going to end the crisis,” wrote Steve Barrow, currency and fixed-income strategist at Standard Bank in London, in a note.
“And even if it does in Greece (which is very unlikely), we’d still expect other bond markets to fall away as the market waits for the domino to fall again onto Ireland and Portugal — forcing them to roll over debt as well.”