Europe kept the pressure on Greece to push forward with a painful austerity program on Wednesday after Athens cleared the first hurdle in avoiding a sovereign default.
European leaders congratulated Prime Minister George Papandreou on surviving a confidence vote, but clearly wanted to keep the government's feet to the fire in the more difficult next stage -- implementing reforms rejected by many Greeks.
There is no alternative. We have a plan, now it's time to act on it, it's time to implement it. There is no alternative. There is no Plan B, European Commission spokeswoman Pia Ahrenkilde-Hansen told a news conference.
Chancellor Angela Merkel, leader of EU paymaster Germany, said Greece must more aggressively privatize state-run firms and boost tax revenues. She said the confidence vote was an important step, but Greece must now push through the reforms.
European Central Bank President Jean-Claude Trichet, head of a new financial super-watchdog, said warning lights were flashing red on the euro zone debt crisis.
The message is that it is the most serious threat to financial stability, he said in Frankfurt.
In the United States, Federal Reserve Chairman Ben Bernanke said a misstep would cause political problems in Europe and a quite significant spillover to the U.S. financial sector and the world.
If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system and to European political unity I would conjecture as well, he said at a news conference in Washington.
Worryingly for Brussels and the markets, divisions have again emerged among EU policymakers over how to involve private creditors in the next phase of the rescue, with Merkel telling lawmakers there was only limited support for Germany's position that the banks must do their bit.
Any suggestion that governments are forcing banks to help finance the bailout may be viewed by credit rating agencies as a Greek default or restructuring. That could trigger further catastrophic debt downgrades and suck in Europe's other weak economies.
CABINET APPROVES REFORMS
The Greek cabinet on Wednesday approved draft legislation spelling out details of its new five-year austerity plan, which will now be submitted to parliament on Friday. The thousands of demonstrators chanting their anger late on Tuesday during the confidence vote illustrated widespread public opposition and the big challenges still facing the government.
Papandreou aims to get parliamentary approval for the package of spending cuts, tax hikes and state asset sales by June 28, and to implement it by July 3, in order to secure 12 billion euros ($17 billion) in funding from the European Union and IMF.
Without the aid, Athens will plunge into default next month, sending shock waves through the global financial system.
Urging the cabinet to approve the draft, Papandreou told them: We are in a continuous, tough negotiation with our partners ... the international environment is tough. It is unstable and often nervous.
But Slovak Prime Minister Iveta Radicova said Greece would struggle to pass the measures by the end of June. I am afraid that, in the conditions as they are set today, it will be hardly possible to pass in the Greek parliament, she told reporters.
EU leaders will meet in Brussels on Thursday and Friday to discuss the next steps in supporting Greece although Merkel said she expected no concrete decision on more funding until Athens approved the package.
The leaders are expected to make a political commitment to go on funding Athens for the next 12 months to convince the IMF to release the next tranche of loans in early July, once the fiscal package is implemented.
The euro rose on hopes that the immediate threat of market chaos could be avoided, but the gains were short-lived as traders remained worried about the political will to implement harsh austerity measures in the face of fierce resistance from the Greek public and doubts of Greece's ability to reduce its debt burden without some form of restructuring.
It's not over, one trader said.
YEARS OF MISERY
A Reuters survey of European economists indicated that fellow euro zone periphery states Portugal, Ireland and Spain as well as Greece all faced years of economic misery from dismal growth and painful unemployment.
The forecast for Greece was for practically no growth next year against an IMF prediction of 1.1 percent.
The government won the late-night confidence motion by 155 to 143 with two abstentions after all of Papandreou's Socialist Party deputies voted solidly with the government, signaling they had been brought into line after earlier dissent.
But despite European and IMF calls for unity behind the reforms, all opposition deputies voted against. More than 20,000 protesters chanted insults outside parliament during the vote.
With unions bristling for a fight and much of the public outraged by new austerity measures as Greece suffers its worst recession for 37 years, implementing any reforms will be tough.
Workers at state-controlled power utility PPC continued a strike for the third day in opposition to a planned sale of part of the company. Various parts of Athens suffered brief power cuts on Wednesday.
Within the parliament there is no problem at all, the real problem is in society, said Costas Panagopoulos of pollster ALCO. There's a lot of disappointment in the Greek society, there's a lot of anger and there's no hope at all. The new minister of finance and the government ... have to offer some hope; otherwise I cannot see how the government could remain stable.
The new mid-term plan envisions raising 50 billion euros by selling off state firms and includes 6.5 billion in 2011 fiscal consolidation -- almost doubling existing measures that have helped extend a deep recession into its third year.
Most analysts remain skeptical that Greece will be able to repay its vast public debt pile of 340 billion euros -- 1.5 times its annual economic output and more than 30,000 euros for each of its 11.3 million people -- even if the reforms are implemented.
Mohamed El-Erian, head of PIMCO, the world's biggest bond fund, said he expected Greece to end up defaulting on its debt.
For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default, he said.
But for now both the markets and European policymakers are willing to give Greece the benefit of the doubt.
Although this clearly is not going to be a long-term fix, investors see this as a chance that the can will be kicked further down the road, said David Dietze, Chief Investment strategist at Point View Financial Services.
New Finance Minister Evangelos Venizelos, in an attempt to answer a key grievance of protesters, told parliament the government's top priority would be to build a fairer tax system.
He is expected to drop plans for an increase in fuel tax and for a special levy on real estate, instead targeting the self-employed -- widely believed to be among the worst tax evaders -- while lowering the burden on low-paid employees.
Euro zone officials have told Reuters the plan for the new bailout, meant to extend Greece's year-old 110-billion-euro deal and fund it into late 2014, would feature up to 60 billion euros of fresh official loans, 30 billion euros from the private sector and 30 billion euros from privatizations. (Additional reporting by Renee Maltezou, Lefteris Papadimas in Athens, John O'Donnell in Brussels and Faith Hung in Taipei; Writing by Barry Moody; Editing by Janet McBride, Gary Crosse)