Rejecting austerity means default, says EU

With the Greek parliament debating a raft of spending cuts, tax rises and privatisations, the EU's top economic official, Olli Rehn, dismissed reports that Brussels was working on fallback options to keep Greece afloat if the plan was rejected.

“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.

“To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default,” Rehn said. 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.

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.

With Greece close to bankruptcy, trade unions promised to fill the streets of central Athens and surround parliament from Tuesday to try to prevent lawmakers approving the painful measures in votes on Wednesday and Thursday.

“We expect a dynamic and massive participation in the strike and the march to the centre of Athens. We will have 48 hours of working people, unemployed, young people in the streets,” ADEDY public sector union leader Spyros Papaspyros told Reuters.

Some 5,000 police have been drafted into central Athens, mostly to protect parliament. Police fired tear gas to disperse a small group of youths throwing sticks and bottles on Tuesday during an otherwise peaceful protest by thousands in Syntagma Square outside the neoclassical legislature building.

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. The cost of insuring Greek debt against default and short-dated government bond yields rose on Tuesday as investors remained nervous before the parliamentary votes. However the euro was broadly steady, with fears of a default offset by signs that euro zone authorities are making progress with banks on a voluntary rollover of Greek debt.

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 have threatened to vote against some or all of the measures, putting the outcome in doubt.

New Finance Minister Evangelos Venizelos has tried to woo wavering backbenchers by promising a renegotiation of the balance of the programme towards promoting economic growth in September.

If Greece approves the legislation, euro zone finance ministers meeting on Sunday is  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.