Prospects that Greece would pass an austerity package needed to avoid sovereign default improved on Tuesday when a key deputy added his support, even as street protests turned violent in Athens.
In a boost to embattled Prime Minister George Papandreou, one of his three deputies from his ruling Socialist party backtracked and said he would support the five-year plan of budget cuts, tax rises and privatization, vital for Greece to win EU/IMF funds in July needed to pay its debts on time.
I have made the decision to vote for the plan because national interests are more important than our own dignity, Thomas Robopoulos told Reuters.
That strengths the government position for the first vote due on Wednesday, which has unleashed furious objections on the streets of the capitol. Hooded youths threw stones, wielded sticks and set fire to garbage bins and a truck outside parliament as riot police fired tear gas to disperse them. Trade unions began a 48-hour strike against the EU/IMF-imposed measures.
Growing market confidence that the Greek parliament will approve the austerity program, and that a French plan to roll over Greek sovereign bonds will help avert a default, lifted global stocks and the euro despite the mayhem. World stocks rallied 1 percent as investors took on more risks, their worries receding that the Greek crisis would worsen.
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.
Progress was reported in talks to persuade European banks and insurers to voluntarily roll over maturing Greek debt under a planned second rescue package designed to give the euro zone country a breathing space. German banks were looking at the proposal backed by France.
The EU's top economic official, Olli Rehn, stressed that any further assistance for the debt-crippled nation hinged on parliament adopting the austerity package in crucial votes on Wednesday and Thursday.
The only way to avoid immediate default is for parliament to endorse the revised economic program ... They must be approved if the next tranche of financial assistance is to be released, he said in a statement.
To those who speculate about other options, let me say this clearly: 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.
The blunt alternative was underscored by Bank of England Governor Mervyn King, who told British parliamentarians that policymakers were working on ways to limit the damage from a potential default on Greece's 340 billion euro debt pile.
What we're doing is to say there is sufficient concern in the market about the possibility of default for us to think about contingency plans and the consequences of this event, King said.
He urged greater transparency about sovereign exposures to prevent a sudden, broad-based loss of confidence in European banks in the event of a Greek default, which could trigger a new credit crunch.
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, focal point of weeks of mass demonstrations, some modeled on the encampment of unemployed Spanish indignados in Madrid.
The EU and IMF have said Greece must enact both the five-year austerity plan, with 28.6 billion euros in savings, and key implementing laws for structural reforms and state asset sales to secure the next 12 billion euro slice of aid in July.
Without that, Athens would run out of money within weeks unless it received some outside lifeline.
Risk premia 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 debt rollover.
The euro also hit a session high against the dollar, with fears of a Greek default offset by signs that European authorities and banks are making progress on a debt rollover.
Prime Minister George 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, putting the outcome in doubt.
One possible scenario that could cause trouble would be if parliament approved the five-year austerity plan but voted down some of the implementing bills, for example on privatizations.
Conservative opposition leader Antonis Samaras underlined his opposition to the economic plan despite massive pressure from fellow center-right European leaders to back it.
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 rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout agreed last year.
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.
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 have the largest foreign private sector exposure to Greece, followed by Germany.
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.
Credit ratings agencies withheld comment pending details of the scheme.
Standard & Poor's said on Monday it was too soon to judge the ratings impact of the private debt rollover being put together for Greece, which it had not yet seen, but did not rule out avoiding a downgrade to default.
Asked if he could imagine a solution in which private creditors voluntarily contributed to a Greek rescue package without triggering an S&P downgrade, Moritz Kraemer, head of European sovereign ratings, told Austrian television:
It is conceivable depending on the situation. That is why I say it is not possible at all to draw a final conclusion on this in the current situation.
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.
(additional reporting by George Georgiopoulos in Athens, Philipp Halstrick and Ed Taylor in Frankfurt, Marius Zaharia and Ana Nicolai da Costa in London, Mike Shields in Vienna, Stephen Brown in Berlin; Writing by Paul Taylor, editing by Mike Peacock/Janet McBride/Stella Dawson)