Confidence vote reminds Europe that threat of default is far from over

More protests expected as new government attempts to sell austerity to the people. Daniel Howden reports from Athens

(Rex Features)

Greece faces a day of political drama as the government faces a confidence vote in parliament tonight against a backdrop of a looming EU ultimatum of more austerity measures in return for the loans the country needs to avoid a disastrous default.

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Eurozone finance ministers have given Greece's beleaguered ruling Socialists a fortnight to pass new far-reaching austerity measures or lose out on a €12bn instalment of last year's bailout, and a new €110bn rescue package.

The tougher-than-expected stance from the EU further raised the political temperature in Athens, where tens of thousands of protesters are expected to surround parliament ahead of tonight's vote.

Greece's Prime Minister, Giorgos Papandreou, is expected to survive the confidence vote, called after last week's failure to pass new austerity measures, despite rising public anger at what are seen as unfairly harsh terms attached to the loans needed to repay the country's debt mountain.

"The probability of a no-confidence vote is very remote," said Greek economist Yannis Stournaras, Professor of economics at Athens University. "It can be taken for granted that the government will pass the vote and the medium-term package of reforms will also pass."

The controversial measures required from the EU and International Monetary Fund in return for a fresh bailout include deeper spending cuts, more tax rises and an ambitious, rapid privatisation programme.

However, a year on from Greece's first bailout, the national debt is 150 per cent of GDP, and the economy is still struggling. Markets have come to view some form of default as a near-certainty as have many Greeks who are angry with the impact of the first round of austerity measures.

The real uncertainty focuses on the second vote expected on 28 June where the weakened government must marshal its slim parliamentary majority into voting for toxically unpopular measures demanded by the EU and IMF.

Greek economist and popular blogger Yannis Varoufakis accused the EU heavyweights France and Germany, as well as the European Central Bank, of making "incredible threats" to protect their own financial institutions, which are heavily exposed to Greek debt.

The threat to stop bailing out Greece, if carried through, would trigger a financial chain reaction, Mr Varoufakis argued, that "would mean the euro was history within a week".

Fears of the financial chaos that would ensue from a disorderly Greek default drove shares and the euro sharply lower during trading yesterday, with bank shares across the EU taking the brunt of the punishment. In London, shares in Barclays, Royal Bank of Scotland and Lloyds Banking Group fell sharply as talk of a "second credit crunch" revived fears of the crisis of 2008-09, which saw some banking groups nationalised or reliant on vast state aid. Italian and French banks were also notable casualties; investors suspect that they have insufficient capital, even without the stress of another sovereign debt crisis.

The problem for many of these institutions is that, ironically, they are required to hold bonds issued by eurozone governments as supposedly ultra-safe assets in reserve. The FTSE 100 fell to a three-month low, and stock markets across Europe retreated, although the single currency itself recovered later in the day as hopes for a deal revived.

Jean-Claude Juncker, who chairs the eurozone finance ministers' group, continued to insist that a deal was in prospect and that Greek debt remained sustainable despite the markets' verdict. But he stressed that Athens would have to pass the new package of cuts, tax hikes and sell-offs before more loans would be forthcoming.

"The approval of the Greek parliament is absolutely essential and it will have to arrive in a timely fashion so we can take a decision on 3 July," Mr Juncker said yesterday.

Greece's new finance minister Evangelos Venizelos – a member of the ruling party's old guard who was promoted to strengthen ruling party unity last week – said the government would pass both the confidence vote and the austerity measures.

"The overriding aim is to develop a clear relationship of trust, to stabilise the situation, to have a disbursement of the fifth instalment," he said. "The political time has been compressed a lot. Each day is of extreme importance and hence we cannot afford to waste a single hour."

Rolling blackouts began last night in some areas of Greece as the public power corporation – which faces privatisation under the new measures – began a 48-hour strike in opposition to the sell-off.