Greece's parliament approved deeply unpopular austerity measures on Wednesday, despite worsening violence, in a vote vital towards securing international funds and preventing the euro zone's first sovereign default.
Lawmakers approved a five-year package of spending cuts, tax increases and state asset sales by a comfortable margin of 155 votes to 138 in a roll-call vote, handing a significant victory to embattled Prime Minister George Papandreou.
"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers in a final appeal just before the crucial vote.
The bigger-than-expected margin suggested the government should be able to push through laws implementing detailed budget measures and privatizations on Thursday.
The European Union and International Monetary Fund has insisted that Greece pass both Wednesday's 28 billion euro ($40.3 billion) austerity law, as well as Thursday's specific legislation to implement the plan before disbursing the next 12 billion euro ($17.3 billion) tranche of Greece's bailout program the country needs to avoid default next month.
In his speech ahead of the vote, Prime Minister George Papandreou said there was "no plan B."
"We must avoid the country's collapse at all costs. Now is not the time to step back," he said.
The main center-right opposition party had said that it would vote against the package, and several members of the ruling PASOK party were known to be opposed to cuts that analysts have said could have severe effects on Greek standards of living.
Much of the focus had been on independent and dissident members of the opposition parties to bow to international pressure and accept the package despite public opposition.
Rioters, Police Clash Outside Parliament
Outside parliament, fierce clashes raged between stone-throwing masked youths and riot police, who fired clouds of teargas from behind steel crash barriers to keep the rioters at bay. Syntagma Square resembled a battle zone at times.
One group of anarchists armed with sticks and iron bars attacked finance ministry offices just off the square, smashing windows at the entrance and on higher floors. They were driven off by police in more than two hours of cat-and-mouse clashes.
With the country on the brink of bankruptcy and social unrest mounting, it remains unclear whether the government can stick to a tight schedule imposed by the IMF and EU to implement the harsh measures, even if it wins all this week's parliamentary votes.
The full pain of pay and benefit cuts, and swinging tax increases has yet to be felt, and public anger is boiling.
Many economists and investors still expect Greece to default in the medium-term. A senior German ruling coalition politician, Free Democratic floor leader Rainer Bruederle, said on Wednesday a debt restructuring was inevitable.
Only one PASOK party deputy, Panagiotis Kouroublis, voted against the plan, and he was immediately expelled from the party by Papandreou. At least one opposition deputy broke ranks with the main conservative New Democracy party to vote "yes" on the austerity package and one of three PASOK rebels changed heart.
PASOK now holds 154 seats in the 300-member chamber and was helped by the abstention of a small center-right splinter group of five deputies, led by former foreign minister Dora Bakoyanis.
Chancellor Angela Merkel of Germany, the main contributor to the Greek bailout, was first to praise the "brave" Greek vote on the fiscal package.
The decision was "brave as well as necessary," Merkel told a meeting on financial regulation in Berlin, adding: "I find it especially regrettable that the Greek opposition is not supporting the reform package."
French Plan Advances
If the implementation legislation passes, euro zone finance ministers meeting in Brussels Sunday are likely to agree to release the next aid tranche, with the IMF following on July 5.
Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial bailout.
The new program would involve some 30 billion euros in private-sector participation via a "voluntary" rollover of maturing debt, a similar sum from privatization revenues and an expected 55 billion euros in new official funding.
Banking sources said Wednesday they had received signals that credit ratings agencies would accept a French plan for a voluntary private sector rollover of Greek debt without declaring a default event that could trigger market contagion.
Euro zone banks and insurers are considering the plan under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's GDP growth rate.
Of the other half, 30 percent would be paid in cash and 20 percent would be invested in a "guarantee fund" of zero-coupon AAA securities with deferred interest that might be issued by the euro zone rescue fund, officials and banking sources said.
European Central Bank policymaker Juergen Stark rejected any idea of EU guarantees as part of a Greek debt solution.
Asked about a scenario in which banks would exchange their Greek bonds for new paper backed by guarantees from EU states -- an approach similar to "Brady bonds" used in Latin America in 1989 -- he said: "This instrument is disqualified." It would breach EU treaty rules, he added.
France had the largest foreign private-sector exposure to Greece at more than $56 billion, followed by Germany, at end 2010, data from the Bank for International Settlements shows.
Two sources close to the negotiations told Reuters that German banks had agreed to use the "French model" as a basis for talks with the German Finance Ministry Thursday. German Deputy Finance Minister Joerg Asmussen also called the French plan a good basis for discussions.