Greek Govt. battles on to avert bankruptcy

Thursday, 23 June 2011 00:00 - - {{hitsCtrl.values.hits}}

ATHENS (Reuters): Greece’s government will approve its new austerity package on Wednesday after it survived a confidence vote, clearing the first hurdle in a battle to secure emergency loans and avert the euro zone’s first sovereign debt default.

Prime Minister George Papandreou’s reshuffled cabinet aims to get parliament approval for a package of spending cuts, tax hikes and state asset sales by June 28 and then push through laws needed to implement it within the next two weeks to avoid missing out on 12 billion euros ($17 billion) in aid and plunging into bankruptcy.

The vote follows a European ultimatum linking the release of the next installment of a 110 billion euro EU/IMF aid package due in two weeks to a new five-year belt-tightening plan.

Without the loans, Athens will run out of cash next month and policymakers fear a default would send shock waves through the global financial system.

The euro rose in hopes that the immediate threat of market chaos could be avoided, but the gains were short-lived as traders cited concerns about implementation of harsh austerity measures in a nation bruised by its worst recession in 37 years and doubts about Greece’s ability to reduce its debt burden without some form of restructuring.

“The reaction of the people is going to be critical. If we see cars burning and protests tomorrow, then all this short term success is going to get sucked out the window,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts.

Speaking just hours after the vote, Mohamed El-Erian, head of Pimco, the world’s biggest bond fund, said he expected Greece to end up defaulting on its debt.

“For the next three years, we’re going to see different economies work out different problems. For European economies, especially Greece, it would be through default,” El-Erian told a conference in Taipei.

Papandreou managed to stifle dissent within his party last week by replacing unpopular government figures with critics of the austerity plan and repeatedly hammering home the message of what was at stake.

“If we are afraid, if we throw away this opportunity, then history will judge us very harshly,” Papandreou said in a final appeal for support before the confidence vote.

All of Papandreou’s Socialist Party deputies voted solidly with the government, handing him a victory by 155 votes to 143 with two abstentions, while thousands of protesters besieged the parliament building, shouting insults at politicians and shining hundreds of green laser lights at the building and at Greek police.

Having already missed targets agreed in its first, year-old bailout, Athens needs the reforms to keep receiving those funds and secure a second bailout worth an estimated 120 billion euros.

The new mid-term plan envisions raising 50 billion euros by selling off state firms and includes 6.5 billion in 2011 fiscal consolidation, almost doubling existing measures that have helped extend a deep recession into its third year.

Most analysts remain skeptical that Greece will be able to reduce its vast public debt pile of 340 billion euros, 1.5 times its annual economic output and more than 30,000 euros for each of its 11.3 million people, even if the reforms are implemented.