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Greece faces further obstacles in bailout deal

Protesters pass by a burning cinema in Athens, Sunday, Feb. 12, 2012. Riots engulfed central Athens and at least 10 buildings went up in flames in mass protests late Sunday as lawmakers prepared for a historic parliamentary vote on harsh austerity measures demanded to keep the country solvent and within the eurozone. (AP Photo/Kostas Tsironis)

Employees of the Greek Stock Exchange are seen next to charts with stock prices, indicating gains, in Athens, Monday, Feb. 13, 2012. World stock markets rose Monday after Greece's parliament approved a new set of austerity measures that were required by international lenders in exchange for an emergency bailout. (AP Photo/Thanassis Stavrakis)

European Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Monday, Feb. 13, 2012. The EU's top economic affairs official says the Greek parliament's approval of a new austerity package is a "crucial step forward" in getting a second, euro130 billion ($171 billion) bailout. (AP Photo/Yves Logghe)

A municipality worker cleans up a pavement outside a burned bank in central Athens, Monday Feb. 13, 2012. Firefighters are dousing smoldering buildings and cleanup crews are sweeping rubble following a night of rioting in central Athens after lawmakers approved harsh new austerity measures demanded by bailout creditors to save the debt-crippled nation from bankruptcy. (AP Photo/Petros Giannakouris)

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By GABRIELE STEINHAUSER, The Associated Press Updated 7:11 PM Monday, February 13, 2012

BRUSSELS — Greece faces further hurdles and delays before it can receive a second, €130 billion ($171 billion) bailout despite its lawmakers voting through more austerity measures in the face of violent protests.

The European Union's Economic Affairs Commissioner Olli Rehn on Monday called the Greek Parliament's approval of a further round of budget cuts a "crucial step forward," but Germany insisted it would still take some time before the second bailout is delivered.

Germany, which as Europe's biggest economy pays the largest part in bailout deals, said it wouldn't give its final approval for the new aid payments until early March — after it becomes clear how many banks and investment funds are willing to take losses on their Greek bonds and the parliament in Berlin votes on the new measures.

Pushing the new bailout back for several weeks underlines the amount of distrust that has built up against Greece over the past two years, when many promised cuts and reforms were passed in its Parliament but never actually implemented.

But it also means that Greece, its citizens, and the rest of the world economy won't know for several weeks whether the country can avoid a potentially disastrous default. A bankruptcy could force Greece out of Europe's euro currency union, drag down other troubled eurozone countries and further roil global markets.

The uncertainty over European Union financial reforms and the region's weak economic outlook led the rating agency Moody's Investor Service to downgrade its credit ratings on Italy, Portugal and Spain, while lowering the outlook for its ratings on France, Britain and Austria to "negative" from "stable." Moody's also cut its ratings on the smaller nations of Slovakia, Slovenia and Malta.

"Germany is trying to get the best deal it can by putting pressure on Greece now," said Ben May, European economist at Capital Economics in London. The idea is to "give Greece a bit more of an incentive over the next few weeks to speed things up and get things moving."

But delaying the final approval of the bailout is not without risk. Uncertainty over the new rescue money could dissuade some of Greece's private investors from participating in a separate bond swap deal, May warned. A hitch in getting the bailout package through national parliaments in the eurozone could also push Greece perilously close to missing a €14.5 billion bond redemption on March 20, he added.

German Finance Minister Wolfgang Schaeuble stressed that Europe was doing everything to help Greece avoid bankruptcy, "but Greece itself of course must want that." He told German public broadcaster ZDF that if Greece were to default on its debt, Europe "is better prepared now than two years ago."

Greece's political leaders scrambled over the weekend to get new far-reaching austerity measures through Parliament ahead of a meeting of the finance ministers from the 17 euro countries on Wednesday. The drastic cuts debated on Sunday included axing one in five civil service jobs over the next three years and slashing the minimum wage by more than a fifth.

As Greek lawmakers voted on the new cuts, the streets of Athens and other cities were rocked by violent protests. In Athens, at least 50 buildings were burned while dozens of stores and cafes were smashed and looted. Police arrested at least 79 pople and detained a further 92, while in several cases they had to escort fire crews to burning buildings after protesters prevented access.

However, the Greek Parliament's vote hasn't brought an end to the uncertainty. Apart from some technical decisions, several key issues remain:

—It is unclear whether the new spending cuts, the debt relief deal and the new bailout will be enough to bring Greece's debt load down to 120 percent of economic output by 2020 — the maximum its international creditors perceive as sustainable.

Several weeks ago, the EU estimated that there was still a financing gap of around €15 billion ($20 billion) and an EU official on Monday could not say whether the gap has since decreased. There is hope that the European Central Bank, which also holds a significant amount of Greek debt can help close that gap by forgoing profits on those bonds.

—Greece's debt sustainability depends on whether enough private investors participate in a bond swap designed to slice some €100 billion ($132 billion) off Greece's €350 billion ($464 billion) debt pile. Athens wants banks and other investment funds to exchange their old Greek bonds for new ones with half the face value, lower interest rates and longer repayment deadlines. But the deal will only work if almost all private bond holders take part. If not enough of them sign up, Greece could still pass new legislation that could force holdouts to participate.

—Athens still needs to spell out how exactly it plans to cut an extra €325 million in spending this year. The sum was included in the austerity package that passed through parliament, but Greece hasn't said where the money will come from. An EU official said Monday that much of the €325 million could come from further cuts to Greece's defense budget.

—The other 16 countries that use the euro are still waiting for the leaders of Greece's two main political parties to commit in writing to implementing the new austerity measures even after elections expected for April. Both the Socialists and the center-right New Democracy party backed the package in the parliamentary vote, but New Democracy leader Antonis Samaras has said that he disagrees with some of the measures.

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