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Respite for the Euro: Greece Dodges Insolvency by Passing Austerity Package

The Greek parliament on Wednesday passed a vital 28 billion euro austerity package, allowing the country to avoid immediate insolvency. Efforts to come up with a vast new bailout for Athens have also made progress this week.

Greek parliament on Wednesday passed a massive new austerity package. Zoom
DPA

Greek parliament on Wednesday passed a massive new austerity package.

European stocks began rising even before lunch. With Greek Prime Minister Giorgios Papandreou's socialists looking to have enough votes despite their razor-thin parliamentary majority, investors on Wednesday morning were betting against a Greek insolvency.

And lawmakers in Athens didn't disappoint. With 155 out of 300 parliamentarians voting "yes" to the €28 billion ($40 billion) package of spending cuts and tax increases over the next five years, the Papandreou government got the simple majority it needed. A second bill, related to the implementation of the cuts outlined in Wednesday's package, needs to pass on Thursday.

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Photo Gallery: Athens Riots Escalate as Parliament Votes
The passage of the belt-tightening measures was a critical step for Greece to avoid immediate insolvency. The European Union had made passage of the package of laws a condition for the release of the next €12 billion tranche from the €110 billion Greek bailout package passed last year. Without that money, Greece would have defaulted on its debt by mid-July.

Still, despite the high stakes, much of the conservative opposition rejected the bill. But with at least one conservative lawmaker voting in favor and a handful of abstentions, the opposition could only muster 138 "no" votes.

'An Important Step Forward'

Many among Papandreou's socialists are also deeply skeptical of the additional austerity measures and the prime minister faced a party rebellion earlier this month. His cabinet reshuffle, and the appointment of a new finance minister, proved enough to quell the revolt, however. Only one socialist lawmaker voted against the bill and he was immediately expelled from the party by Papandreou.

In Brussels, European Union leaders praised the vote. "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." They added it is likely Greece would now receive its next €12 billion tranche of financial assistance, which is needed to tide Athens over this summer until the EU can agree on a second bailout package for the country.

In Germany, a spokesman for Chancellor Angela Merkel of the conservative Christian Democratic Union party greeted the decision, describing it "as truly good news" on his Twitter feed. The chancellor was expected to make her own statement later on Wednesday.

Even with the release of the next tranche of aid from the European Union and the International Monetary Fund, Greece faces a rocky road to financial health. The timeline for implementation of the austerity measures imposed by the EU and the IMF is tight and the list of economists and investors who still expect Greece to default on its debt is long.

The vote came as protesters clashed with riot police on the square outside the parliament building. Demonstrators overturned barriers and threw bottles and trash at police, who responded with volleys of teargas. As the vote was being carried out, some 30 people attacked the Finance Ministry with sticks and iron bars.

In response to protester threats to encircle parliament in an effort to prevent deputies from casting their votes, much of central Athens was sealed off to traffic on Wednesday. Several minor injuries had been reported by mid-afternoon.

'Our Hand for a Solution'

The European Union and the International Monetary Fund are also in the process of negotiating a second bailout package for Greece, the value of which could be as high as €120 billion. Talks on the package have been slow, with Germany insisting that private investors be involved in any bailout plan. Others have been concerned that forcing investors to renounce part of their claims could be viewed as a default by ratings agencies, leading to further downgrades. That, in turn, could severely worsen the already dire crisis facing Greece.

On Tuesday and Wednesday, however, a French plan aimed at breaking the deadlock appeared to be gaining traction. The plan involves French banks voluntarily rolling over 50 percent of their Greek bond holdings into new bonds which wouldn't mature for another 30 years. Several media reports have indicated that German banks may also view such a plan favorably.

Deutsche Bank CEO Josef Ackermann said at a Wednesday meeting with Chancellor Angela Merkel's Christian Democrats that the German financial sector is likely to help rescue Greece to head off a "meltdown," according to an Associated Press report. "I believe that we will offer our hand for a solution."

cgh -- with wire reports

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Where the Greeks Plan to Save
The Greek government voted on Wednesday against allowing the country to become insolvent. With its radical austerity measures, Athens is hoping to save close to €80 billion in the next few years. But what concrete steps are to be taken? SPIEGEL ONLINE provides an overview of the savings measures.

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