Photo: Reuters - A rainbow appears over the Greek parliament in Athen's Syntagma square on January 25 2012

Greek lawmakers will vote this weekend on a controversial austerity bill that Athens needs to avoid a messy default but which is fuelling a domestic political and social crisis that has brought thousands of Greeks out on the streets in protest.

The cabinet approved the draft bill late on Friday - paving the way for a new multi-billion euro bailout and a debt-cut plan - after another day of rocky politics where six cabinet members resigned over the additional austerity demands.

Photo: Reuters - A man tries to replace a torn off EU flag atop the Greek Ministry of foreign Affairs in Athens Feburary 8, 2012.

Analysts expect the deeply unpopular package to be adopted by parliament on Sunday after being discussed in committee on Saturday, but the political situation remains highly unstable and a number of lawmakers have said they would vote against it.

Photo: Reuters - (From L to R): Far-right leader George Karatzaferis, conservative party leader Antonis Samaras, Prime Minister Lucas Papademos and Socialist leader George Papandreou meet at the Prime Minister's office

Even after the vote is completed, the EU expects the government to specify a further 325 million euros ($430 million)of spending cuts before it agrees to the 130-billion-euro bailout.

The EU and IMF have been exasperated by a series of broken promises and weeks of disagreement over the terms of the bailout, which would be Greece's second since 2010, and will not release the aid if they do not get clear commitments by main party leaders that the reforms will be implemented.

Photo: Reuters - Demonstrators from the communist-affiliated trade union PAME protest outside the Greek Prime Minister's office in Athens February 4, 2012.

The uncertainty has roiled world financial markets, with stocks snapping a five-day winning streak on Friday and the euro slumping as planned wage and pension cuts in Greece hit a new obstacle.

Outside Greece's parliament, police fired teargas at black-masked protesters who threw petrol bombs, stones and bottles at the start of a 48-hour general strike against the cuts ordered by the troika of international lenders.

But the street protests against the austerity - which many Greeks blame on Germany - were relatively small compared to last year's mass rallies.

Unions have called protesters to rally again in Saturday and Sunday after they chanted on Friday: Do not bow your heads! Resist! No to layoffs! No to salary cuts! No to pension cuts!

The biggest police trade union said it would issue arrest warrants for Greece's international lenders for subverting democracy, and refused to fight against our brothers.


The bill, approved by the cabinet along with hundreds of pages of accompanying documents, sets reforms including a cut of the minimum wage by 22 percent, pension cuts worth 300 million euros this year, as well as health and defence spending cuts.

But it does not spell out the exact amount of the bailout, which is left blank. Euro zone officials have said another 15 billion euros may be needed for the recapitalisation of Greek banks after the debt swap.

The government believes that sustained implementation of this policy programme, complemented by debt restructuring, will put the public debt on a clear downward path, it says in a draft letter to EU and IMF chiefs, attached to the bill.

In the same letter, the government pledges to speed up implementation of reforms in the labour, product and services markets, cut spending, and push through a privatisation plan.

Technocrat Prime Minister Lucas Papademos, who was parachuted into the helm of a coalition government in November to clinch deals on the twin bailout and debt-swap deals, told his turbulent cabinet earlier on Friday to accept the harsh bailout terms or condemn the nation to disaster.

We cannot allow Greece to go bankrupt, he said. Our priority is to do whatever it takes to approve the new economic programme and proceed with the new loan agreement.

Greece faces bankruptcy unless it gets the funds from the IMF and European Union by March 20 when it has to repay 14.5 billion euros ($19 billion) in maturing bonds.

It goes without saying that whoever disagrees and does not vote for the new programme cannot remain in the government, Papademos said in televised remarks.

A minister who took part in the cabinet meeting later said the draft bill was approved. The text also lays out the legal groundwork for a debt swap plan in which private sector bondholders will agree to take a real loss of 70 percent to help bring the country's debt down.

One of the attached documents, which spells out the reforms Greece will have to undertake in return for the aid, says the target of cutting the debt to about 120 percent of GDP by 2020 from about 160 percent now will be achieved.


Analysts say only a breakdown of party discipline can sink the package in parliament, where the coalition has a huge majority.

There will most likely be a string of defections and abstentions but I don't believe that the measures will fall short of the majority required, political analyst George Sefertzis told Reuters.

Far-right leader George Karatzaferis, who leads the junior party in the coalition formed in November, said later on Friday he could not back the tough terms attached to the bailout and all four cabinet members of his LAOS party submitted their resignations, along with two from the socialist PASOK party.

The PASOK party, however, called on its lawmakers to vote for the bailout, even though 35 of its lawmakers protested against pressure from euro zone ministers.

Our lenders are once again presenting the dilemma: either you take the measures or you lead the country to a default, they said in a protest letter. ($1 = 0.7582 euros)