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Papandreou Clinches Votes for Second Greek Budget Bill

Greek Prime Minister George Papandreou
Greek Prime Minister George Papandreou, right, speaks with Finance Minister Evangelos Venizelos during the vote on the implementation law that will accompany the Medium-Term Programme, in Athens, Greece, June 30, 2011. Photographer: Katerina Mavrona/EPA

Greek Prime Minister George Papandreou’s drive to stave off the euro area’s first sovereign default stayed on track after lawmakers backed a bill to authorize an austerity plan required to keep rescue aid flowing.

The premier won the vote by 155 to 136, allowing him to implement a 78 billion-euro ($112 billion) package of tax increases and asset sales that was a condition of receiving further European Union aid. Those steps were approved in a vote yesterday which was marred by street violence as police fired tear gas on crowds. That ballot was carried by 155 votes to 138.

Greece’s largest public-sector labor union plans a further rally today in an extension of protests of more than 20,000 people that gripped the city center this week. Parliament has become the focus of repeated riots that underscore the challenge Papandreou faces in executing his plan in an economy suffering recession while appeasing the EU partners funding its debts.

“Today’s vote is constructive, and will clear the way for EU help,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “However, it just buys time which creates a buffer to allow making a default or restructuring less painful. The market is expecting Greece to default and it will not change its mind.”

Default Risk

Two-year Greek government bond extended gains after the result, pushing the yield down 62 basis points to 26.69 percent at 5:21 p.m. in Athens. The euro was little changed after the result, trading at $1.4469.

The cost of insuring Greek sovereign debt earlier rose 33 basis points to 1,978 basis points, according to CMA prices for credit-default swaps. That signals an 82 percent probability the nation will fail to meet its commitments within five years.

Attention now shifts to Brussels where Greek Finance Minister Evangelos Venizelos will meet his counterparts from the rest of the euro region on July 3 and on July 11 to hammer out a second bailout that will involve financial institutions.

Germany’s biggest banks and insurers and the government agreed to roll over Greek debt holdings worth at least 2 billion euros ($2.9 billion), Finance Minister Wolfgang Schaeuble said in Berlin today.

Protest Rally

The road in front of Parliament reopened to traffic today after a cleanup of the area, which was last night strewn with rubble used to pelt riot officers. A repeatedly torched van nearby had been removed, though the shell of a burnt-out newspaper kiosk remains. The protest campsite of so-called “indignants” is still in place in the center of the square facing Parliament.

Labor union ADEDY announced plans to hold a rally at 7:30 p.m. today. “The struggle of the workers will continue and escalate,” it said in an e-mailed statement. Violence scotched the union’s plans to march on Parliament yesterday.

Lawmakers yesterday needed the protection of riot police who frequently deployed tear gas in clashes with hooded protesters. A fire at the Hellenic Post Office, on the ground floor of the building housing the finance ministry opposite the legislature, was doused by fire fighters. Police said 31 officers and 30 protesters were injured.

Venizelos said in Parliament today that the government will take all measures necessary to ensure public order in the country.

Austerity Drive

“The government, regardless of the political cost and fully aware of its historic duty, will ensure law and order are upheld,” Venizelos said. “There is tension and there is real violence and the protection of law and order is obvious. What is important is for the country, state, economy and society of the country to function.”

Papandreou is trying to meet EU demands for imposing further austerity on an electorate already balking at a wave of budget cuts introduced last year. Greek newspaper To Vima calculated the additional burden for an average family of four at 2,795 euros ($4,034) a year, about the same as one month’s income.

“The key underlying risk remains, namely, there is a solvency gap that will require more than just fiscal consolidation and a privatization plan,” said Antonio Garcia Pascual, chief southern European economist at Barclays Capital.

Revenue Shortfall

Under the terms of the new austerity plan, Papandreou has pledged to find buyers for state assets worth 50 billion euros and impose levies ranging from 1 percent to 5 percent on wages. He also plans higher taxes on restaurants and bars, higher heating-oil taxes and lowering the tax-free threshold to 8,000 euros from 12,000 euros presently.

Papandreou has already struggled to implement a first bailout agreed in April last year as tax revenue persistently fell short of targets. That sparked a renewed selloff in the country’s bonds in April as concern mounted a default was inevitable unless a second rescue was negotiated.

“We still expect government debt to remain stubbornly high over the coming years, suggesting that the government may still be unable to borrow from the markets when any bailout package ends,” Ben May, European economist at Capital Economics Ltd., said. “The upshot is that any market rally in response to the government’s victory may prove to be fairly short-lived.”

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