Greece's parliament holds a crucial vote on Wednesday on whether to submit the country to unpopular austerity measures demanded as the price for funds to prevent the euro zone's first sovereign default.
Hooded youths threw stones, wielded sticks and set fire to garbage bins and a truck outside parliament on Tuesday as Greeks protested against the five-year plan of budget cuts, increased taxes and privatisations.
In a boost to embattled Prime Minister George Papandreou, one of three deputies from his ruling Socialist party backtracked and said he would support the austerity plan vital for Greece to secure EU/IMF funds in July.
Without them, Greece would run out of cash within weeks.
I have made the decision to vote for the plan because national interests are more important than our own dignity, Thomas Robopoulos, the deputy, told Reuters.
That strengthens the government's position for the first vote on Wednesday. Debate is scheduled to end at 1100 GMT but the vote may not be held until hours later.
The improved political prospects and signs that commercial banks in Europe will support Greece have prompted a rise in global stocks and the euro.
Papandreou's Socialists hold a narrow majority with 155 seats in the 300-member legislature. But a handful of lawmakers have defected and others are threatening to vote against some or all of the measures.
Even if the chances have risen that parliament will approve the austerity plan in Wednesday's vote, the risk is that lawmakers might reject more detailed bills in votes on Thursday on the implementation of different elements of the plan, such as tax rises or the sale of state assets.
The EU and IMF say Greece must enact both the austerity plan, with 28.6 billion euros ($40 billion) in savings, and the key implementing laws to secure the next 12 billion euro slice of aid in July.
For parliament to vote against this package would be a crime, Greece's central bank governor, George Provopoulos, was quoted as saying in the Financial Times on Wednesday. The country would be voting for its suicide.
Global shares rose on Wednesday and the euro held on to recent gains ahead of the vote as investors priced in less risk of a messy sovereign debt default that could spark a wider financial crisis.
There's some cautious optimism ahead of the Greek votes this week, said Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Tokyo.
But we're also seeing a lot of month-end window dressing and portfolio tweaking.
Risk premiums on lower-rated euro zone government debt fell on news that German banks had agreed in principle to use a French proposal as a basis for negotiating private-sector participation in a Greek financial rescue.
NO PLAN B
The EU and IMF bailed out Greece with a 110 billion euro deal in May last year and later jumped in to keep Ireland and Portugal afloat as the euro zone reeled from high government debt in the wake of the global financial crisis.
The latest prescription for Greece is unpopular among many ordinary people.
Riot police used tear gas on Tuesday to try to break up the violence outside parliament.
By nightfall, several hours of clashes involving hundreds of youths had subsided and central Athens had been reclaimed by thousands of peaceful protesters denouncing measures they say hit salaried workers and the unemployed while sparing the rich.
Some 5,000 police were drafted in, mostly to protect the colonnaded parliament building on Syntagma Square, the focal point of weeks of mass demonstrations, some modeled on the encampment of unemployed Spanish indignados in Madrid.
Trade unions began a 48-hour strike against the EU/IMF-imposed measures.
The negative reaction you are getting from the public is a sign that the parliament is likely to vote in favor of the austerity plan, said Marc Pado, U.S. market strategist at Cantor Fitzgerald in San Francisco.
The EU's top economic official, Olli Rehn, stressed that any further financial assistance for Greece hinged on parliament adopting the austerity package.
The only way to avoid immediate default is for parliament to endorse the revised economic programme ... They must be approved if the next tranche of financial assistance is to be released, he said in a statement.
There is no Plan B to avoid default, Rehn said, dismissing widespread reports that Brussels was working on a fallback plan to keep Greece afloat.
Newly appointed IMF chief Christine Lagarde called on Greek lawmakers to join together in supporting the austerity plan, although Greece's Conservative opposition leader Antonis Samaras reiterated his objections.
This policy is wrong, it has exhausted the Greek people and Greek society, he told parliament. If we perpetuate this mistaken policy we will only make things worse, both for Greece and for Europe.
If Greece approves the legislation, euro zone finance ministers meeting in Brussels on 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 110 billion euro bailout.
The new programme would involve some 30 billion euros in private-sector participation via a voluntary rollover of maturing debt, a similar sum from privatisation revenues and an expected 55 billion euros in new official funding.
Euro zone banks and insurers are considering a French plan outlined by President Nicolas Sarkozy on Monday 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 cashed out and 20 percent would be invested in zero-coupon AAA securities with deferred interest that might be issued or guaranteed by the euro zone rescue fund, officials and banking sources said.
French banks had the largest foreign private-sector exposure to Greece at more than $56 billion, followed by Germany, at the end of 2010, data from the Bank for International Settements 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 on Thursday. German Deputy Finance Minister Joerg Asmussen also called the French plan a good basis for discussions.
In Berlin, visiting Chinese Prime Minister Wen Jiabao said Beijing had faith in the European economy and the euro and was optimistic that Europe could overcome its temporary challenge.
As in the past, he gave a vague commitment to buying euro zone debt without specifying countries or amounts.