A protester wears national flags on her hand as she protests at Syntagma square in front of the Greek Parliament on June 22, 2011 in Athens, Greece.Milos Bicanski/Getty Images
Beleaguered Greek Prime Minister George Papandreou survived a close confidence vote in parliament early Wednesday, paving the way for a new round of tough budget cuts, tax hikes and asset sales.
Greece's euro-zone partners have demanded the cutbacks and other austerity measures in exchange for more emergency loans to the insolvent government.
During debate on the confidence motion Tuesday, Mr. Papandreou warned: "If we give up in the middle of the road, history will judge us harshly."
At the end, the Prime Minister overcame opposition from within his fractious Socialist party, holding on to all of its 155 votes and a 12-vote margin in the 300-seat chamber. Two legislators abstained.
The vote was designed to get a parliamentary seal of approval for Mr. Papandreou's reshuffled cabinet, most notably new Finance Minister Evangelos Venizelos, whose job will be to steer the unpopular budget measures through the legislature. Previous deep cuts have provoked widespread anger and frequent demonstrations by public-sector workers and others affected by the slumping economy and soaring jobless rate.
Analysts expected the ruling Socialists to survive this confidence test. The next hurdle - the vote next week on the actual budget plan - could be more difficult. Mr. Venizelos has assured his European counterparts that the package of €28-billion in budget cuts, tax increases and privatizations demanded as a condition of further rescue funds will be approved on schedule.
After the vote, riot police fired tear gas and stun grenades to push back a group of about 200 protesters who had broken off from a main rally of several thousand to throw bottles and other objects at the police lines guarding parliament. As deputies voted, several thousand protesters gathered outside chanting "Thieves! thieves!," shining green laser lights at the parliament building and into the eyes of riot police protecting it. Continuing strikes by electricity company workers objecting to privatization caused a second day of rolling blackouts.
However, unless Greece tightens the screws, its euro-zone partners are threatening to withhold the next €12-billion instalment of a €110-billion aid package crafted in May, 2010, by the European Union, the International Monetary Fund and the European Central Bank. Greece is also seeking a second bailout package in excess of €100-billion to tide it over into 2013, when the EU hopes to have a permanent system in place to deal with fiscal crises.
Without the next instalment, Greece will be unable to meet heavy debt obligations, triggering a default that would cascade through the European banking system and spread abroad, affecting any bank, insurer or hedge fund holding European debt or on the wrong end of credit default swaps tied to Greek sovereign bonds. The IMF and other governments have warned the Europeans not to delay the payments, because of the risks to the global financial system.
Politicians around the world have been closely monitoring the European developments, because of fear that the debt crisis in Greece, if unchecked, will infect the healthier and much larger core economies of the euro zone, putting a damper on already slowing global growth and undermining fragile recoveries in North America and elsewhere.
Illustrating Greece's worsening plight, its deficit is widening despite earlier budget slashing. That's because of a sharp decline in tax revenue stemming from a severe recession, which itself has been deepened by government cutbacks.
Some analysts have likened the potential Greek fallout to the financial meltdown that followed the collapse of Lehman Brothers, the big Wall Street investment bank whose key role at the heart of a vast, opaque network of global derivatives trades was underestimated by U.S. officials. As a result, few observers expect the Europeans to let Greece fend for itself if it fails to deliver on the budget cuts and revenue-boosting moves it has promised.
"Even if the austerity measures fail or are amended, it is highly unlikely that the EU-IMF would not forward Athens the money," said Marko Papic, a senior analyst with Stratfor, a global intelligence company in Austin, Tex. "The euro zone has proven to be highly flexible. So when push comes to shove, they will make sure that the crisis does not escalate."
Greece will have to redeem or restructure the terms on about €100-billion worth of long-term bonds maturing in the next three years. These include a €5.9-billion issue in August, followed next March by €14.4-billion, another €8-billion in May and €7.7-billion in August 2012.
After it became impossible to tap the international bond market once Athens' fiscal plight was disclosed and rates skyrocketed, the government was forced to borrow more short-term money. These three- and six-month notes include €4.4-billion due in July, €4.5-billion in August, another €4-billion in September and similar amounts in succeeding months. On top of that, the government needs close to €1-billion a month to finance the deficit and another €500-million to meet interest payments on bonds that have not yet matured. Total debt amounts to about €350-billion.
Some Socialist backbenchers have made it clear they don't like a privatization program that includes important public services such as electricity. Striking workers have triggered blackouts over the planned sale of the main power utility, part of a wave of demonstrations against the austerity cuts. But it seems unlikely that politicians would support the government changes and then turn around a week later and nix the plan the moves were meant to facilitate, analysts said.
"Members of Parliament who support the confidence vote can hardly then be against the government's fiscal program," said Beat Siegenthaler, senior foreign-exchange strategist with UBS in Zurich.
With a report from Associated Press