Greece took a step back from imminent default Wednesday by passing a stinging new austerity package but failed to dispel fear that its mounting debt is becoming unsustainable and, sooner rather than later, will still have to be restructured.
The Greek government eked out a tense legislative victory that saw lawmakers defy raging street protests outside Parliament to vote 155-138 in favor of $40 billion in painful budget cuts and tax hikes over the next few years.
The showdown came after stark warnings from European leaders that failure to pass the austerity plan would spell certain bankruptcy for Greece and potential disaster for the euro by spreading instability to more populous debt-laden nations such as Spain and Italy. That turmoil in turn might shake markets in the United States and other major economies far from Athens.
Lawmakers in Athens are set to vote Thursday on a follow-up measure detailing how the austerity package is to be implemented. Wednesday’s decision lifted the government’s hopes that the second bill would also command the necessary majority in Parliament.
Approval of both measures is necessary for Greece to receive the next installment of funds from the bailout put together last year by the European Union and the International Monetary Fund. Without the fresh infusion of cash, Athens would be unable to pay bills that come due in mid-July and would have no choice but to go into default.
The austerity package, the harshest here in recent memory, also paves the way for a second rescue package for Greece on top of last year’s bailout of about $150-billion. With its economy shrinking, its public coffers depleted and its bond ratings in the basement, Greece is effectively shut out from raising money in the private market and needs another lifeline from its European neighbors and the IMF to stay afloat.
“The choice is simple: Either we press ahead with the road of change, a road that is difficult, or we choose catastrophe,” Prime Minister George Papandreou told lawmakers before Wednesday’s roll-call vote. “We choose the first.”
But analysts have become increasingly gloomy over Greece’s prospects for economic growth and its ability to pay off a debt that far exceeds the country’s entire annual economic output.
Many experts now describe Athens as caught in a vicious cycle from which it cannot escape, as public consumption and tax revenue shrink while loans pile up and the debt burden grows. A previous round of drastic austerity cuts has failed to put Greece back on track as hoped, but the EU and IMF have demanded more of the same, which some say is an attempt to wring blood from a stone.
“The Greeks have actually pulled off an unprecedented amount of fiscal austerity, but it’s had a bigger knock-on effect on their economy than was projected,” said Simon Tilford, chief economist at the Center for European Reform in London. “They’re deep in a debt trap. Further cuts in public spending are just compounding the underlying problem in the economy, which is a huge lack of economic activity.”
Receiving its next round of emergency loans and then a second bailout should buy Athens some time. But investors and analysts are increasingly convinced that a debt restructuring, a euphemism for default, is inevitable, and probably sooner than European officials expect.
“They are aiming at buying two years [of reprieve]. But they won’t get it,” said Yanis Varoufakis, an economics professor at the University of Athens. “They will have to come up with a systemic solution to what is a systemic crisis.”
The EU is afraid that a Greek default would roil markets worldwide, cripple European banks that hold Greek bonds and cause the debt crisis to spread to other financially shaky Eurozone countries.
The new austerity package envisions deep reductions in public spending, such as cuts in welfare payments, as well as higher taxes on everyday items such as soda pop. Successful entrepreneurs and low-wage earners alike would see their tax bills rise.
The government has also committed to an ambitious plan to sell off $72 billion in state assets, including public utilities.
But many analysts are skeptical that Athens will have the political will or muscle to enforce its new austerity regime in the teeth of growing public opposition. A large state sector and government ownership of assets remain articles of faith for many Greeks; so is civil disobedience against unpopular policies.
“What do they expect us to do, sit and take it?” said Nikos Vassiliou, a 48-year-old filmmaker who on Wednesday joined thousands of Greeks in downtown Athens, outside the Parliament building, in protest of the austerity package. “They duped us last year. We’re not going to give in this time around.”
Wednesday was the second day of a 48-hour nationwide strike that brought much of Greece to a halt. As happened Tuesday, violence marred the largely peaceful demonstration in Athens when self-styled anarchists overturned umbrellas and chairs from sidewalk cafes to form barricades and hurled rocks at riot police, who used stun grenades and tear gas to disperse the crowd.
The outcome of the vote in Parliament was never a foregone conclusion. To get the backing he needed, Papandreou had to face down a revolt from some members of his own ruling Socialist party, which had a slender five-seat majority in Parliament going into the vote. Ministers resorted to political arm-twisting, threatening dissenters with expulsion from the party if they did not fall in line.
Nearly all the opposition lawmakers voted against the bill. While acknowledging that cuts are necessary, the main opposition party, New Democracy, argues that the austerity package will condemn Greece to low growth.
Senior Socialist lawmaker Vasso Papandreou (no relation to the prime minister), who had been an outspoken critic of the austerity program, wound up siding with the government.
“The plan is bad and Greece is heading to ruin,” she told her fellow lawmakers. “All we are doing is kicking the can farther down the road.”
But because of the critical nature of the vote, she said, she would back the package anyway, “in full knowledge that I am choosing the knife rather than the pistol.”
Times staff writer Chu reported from London and special correspondent Carassava from Athens.