Greek vote eases fears of sovereign debt default

A controversial austerity package in Greece has been narrowly voted in, clearing the way for the country to access vital cash.

Athenians walk by a broken window of a building in central Athens on Thursday, June 30, 2011. Greek lawmakers are set to pass a bill Thursday to fast-track fresh austerity measures demanded by creditors following two days of rioting in Athens that left some 200 people injured. (AP Photo/Petros Giannakouris)Show less

Greece cleared the final hurdle yesterday towards fast-tracking austerity measures needed to avert a sovereign default and stave off a euro-zone catastrophe.

The country's parliament voted to authorise the passage of a €28 billion (Dh149.29bn) package of spending cuts and tax increases. It was the second part of a two-step process demanded by the IMF and the EU before they release the next batch, totalling €12bn, of a €110bn bailout package agreed in May last year.

Yesterday's bill, which authorised implementation of the austerity package approved on Wednesday, was passed by a vote of 155 to 136.

The package is expected to allow Greece to remain solvent until mid-September.

German banks, which hold more Greek sovereign debt than banks from any country outside Greece, also yesterday agreed to roll over Greek debt holdings through to 2014.

Wolfgang Schaeuble, the German finance minister, said the country's banks were prepared to contribute to the Greek bailout.

Greece is in the throes of a deep recession, its worst economic situation in 40 years, and without the approval of this week's bills the country risked insolvency.

As politicians voted yesterday afternoon, violent protests continued on the streets of Athens.

Analysts said the measure was significant but was hardly a cure for the country's debt woes.

"They need to apply the measures that they are promising and that will not be easy," said John Sfakianakis, the chief economist at Banque Saudi Fransi. "The US is in trouble but they are producing and it still has elements to its economy that keeps it going. Greece doesn't have a lot at the moment."

Greece faces extremely high borrowing costs on international markets and more than €6.6bn of the country's debt matures next month. Its total debt load is expected to peak at 166 per cent of GDP next year. Unemployment rates, meanwhile, are soaring.

Greece's credit default swaps, or the cost of insuring the country's debt, declined in the past few days as uncertainty eased over whether Greece would gain parliamentary approval for the austerity package.

Yet further pressure was heaped on the Greek economy yesterday when Jean-Claude Trichet, the European Central Bank president, signalled officials would still raise borrowing costs next week to slow inflation.

Mr Trichet also said he could not yet endorse a French plan that has emerged as a possible blueprint for private investors' involvement in a rollover of Greek debt without triggering a default or payout in credit insurance.

"At this stage, we have not yet [got] a position," Mr Trichet told the European Parliament's economic and monetary affairs committee when asked about the French proposal. "We are very alert but I cannot give you a precise judgement on what is going on."

However, Ewald Nowotny, an ECB governing council member, told Austrian radio the French proposal was "a very interesting step" that was important for winning political approval in countries such as Germany.

"What is important is that there is a common European solution because it brings little if only an individual country does it.

That is exactly where talks are now taking place," Mr Nowotny said yesterday.

A Greek default would hurt economies around the world as it would be likely to lead banks to freeze lending to other indebted European countries.

Most analysts said yesterday's positive outcome was critical for the short-term health of the global economy, especially for European countries such as Germany and France - Greece's two main creditors - and the stability of the euro. There are differing views over whether it will be the right move in the long run.

"There's still implementation risk over the next few months but for now the default risk has been taken off the table," said Eric Wand, a Lloyds Bank strategist.

Mr Wand forecast renewed pressure on the bonds of weaker euro-zone countries on the edges of the single-currency area after a temporary respite.

"There should be a brief hiatus in the periphery-bashing we've had in the last few weeks, but there are other problems."

Those include the prospect of early Spanish elections and squabbling within Italy's centre-right coalition as the country faces a credit rating downgrade.

Italy's cabinet was yesterday due to adopt a more ambitious deficit reduction plan than it initially planned aimed at saving €47bn by 2014 to try to ward off a loss of creditworthiness.

Euro-zone finance ministers will discuss an aid programme at a meeting in Brussels on Sunday.

Relief that Greece has bought more time to repair its budget sent global equities rallying again yesterday.

* with agencies

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