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Greek parliament backs austerity plan

Greek crisis - Vote suggests government on track
Greek crisis - Vote suggests government on track

Greece's parliament has approved a five-year austerity plan, with 155 votes in favour and 138 votes against.

The figures suggest Prime Minister George Papandreou is on track to win backing for a second crucial vote on Thursday.

Only one member of Papandreou's Socialist party voted against the law and the speaker of parliament announced that he had been immediately expelled from the party. One deputy from the conservative opposition cast a vote in favour.

The European Union and International Monetary Fund have insisted that Greece pass both today's €28 billion austerity law and Thursday's specific legislation to implement it before disbursing the next €12 billion of Greece's bail-out programme the country needs to avoid default next month.

If both votes are passed, euro zone finance ministers meeting in Brussels on Sunday are likely to agree to release the next aid tranche, with the IMF following on 5 July.

Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial €110 billion bail-out.

The parliament's approval pulls the country back from the threat of default and paves the way for a second aid package, the EU's top two officials said.

'The country has taken an important step forward along the necessary path of fiscal consolidation and growth-enhancing structural reform,' European Commission president Jose Manuel Barroso and European Council president Herman Van Rompuy said in a joint statement.

'But it has also taken a vital step back - from the very grave scenario of default. This was a vote of national responsibility.'

Barroso and Van Rompuy said that if the second stage of the vote is also passed tomorrow it would pave the way for disbursement of the next €12 billion tranche of financial assistance to Athens, and allow work to proceed rapidly on a second assistance package later this year.

German Chancellor Angela Merkel said the Greek parliament's vote was a key step for stabilising the euro.

'It is an important step on the one hand for the future of Greece, but on the other hand also for the stability of the euro,' Merkel told reporters in Berlin.

Stark warning over EU guarantees

A senior European Central Bank policymaker has rejected the idea of a Greek debt solution involving EU guarantees, and said Greece would face economic collapse if it restructured its debt.

Asked about a scenario under which banks exchanged their Greek bonds for new paper backed by guarantees from EU states - an approach that would be similar to that used in Latin America in the 1980s - Juergen Stark said: 'This instrument is disqualified.'

'It would break the ban on support - the no bail-out clause in article 125 of the EU Treaty,' Stark, a member of the ECB's Executive Board, told German newspaper Die Zeit in an interview.

The EU is searching for a way to encourage investors to maintain their exposure to the euro zone's most troubled economy.

Stark's comments raise a red flag for new French proposals.

Under these, banks would reinvest 70% of their Greek debt holdings maturing in 2011-14, with 50% going into 30-year bonds and the remaining 20% going into zero-coupon AAA bonds that could be issued or guaranteed by the euro zone's rescue fund, the European Financial Stability Facility.

'The debts of a member state may not be taken over by European institutions or other member states,' Stark said. 'We have rules in the currency union and we must adhere to them.'

ECB President Jean-Claude Trichet said yesterday he was looking at the French proposal for rolling over Greek debt.

He also signalled the intensification of the debt crisis had not derailed plans for a July interest rate rise.

The ECB has repeatedly opposed any Greek debt solution that rating agencies would class a credit event - a default or selective/restricted default.

Stark warned a restructuring of Greece's sovereign debt would hit Greek banks and wreck the country's economy.

'If it comes to a restructuring of debt, the Greek banks would lose some or all of their capital resources as they hold a lot of Greek government bonds,' he said.

'The consequence would be a collapse of the real economy, as sufficient loans could no longer be awarded.'