- Associated Press - Wednesday, February 22, 2012

ATHENS — Greece scrambled Wednesday to adopt a batch of emergency laws that will further cut incomes and government spending, a day after securing a new bailout and debt relief deal designed to stave off bankruptcy.

The new austerity measures demanded by creditors in return for the rescue loans follow two years of deepening misery, with the Greek economy in freefall, unemployment at a record high and the state of the public finances in worse shape than previously forecast. Angry unions have called two separate protest rallies outside Parliament in the afternoon.

On Tuesday, the 17-country eurozone approved Greece’s second financial lifeline in less than two years, worth €130 billion ($172 billion), and a €107 billion ($141 billion) debt writedown on banks and other private holders of Greek bonds.

In response to the writedown agreement, Fitch downgraded Greece’s credit rating further into junk status, from ‘CCC’ to ‘C.’

The agency said a Greek default “is highly likely in the near term” and added that it would briefly consider placing Greece in “restrictive default” once the bond swap is completed — a warning it first issued in June.

Athens argues that the default rating would be a simple technicality, as the twin deals struck on Tuesday will allow the country to repay bonds maturing next month — thus avoiding a disorderly default — and remain in the common European currency it joined in 2001.

Even then, the price of salvation for ordinary Greeks is only just starting to sink in.

Legislation tabled in Parliament late Tuesday outlines a total €3.2 billion ($4.2 billion) in extra budget cuts this year agreed by the Cabinet last week.

The measures include nearly €400 million ($530 million) in cuts to already depleted pensions. Health and education spending will be reduced by more than €170 million ($225 million), subsidies to the state health care system will be cut by €500 million ($661 million), and health care spending on medicine will fall by €570 million ($754 million). And some €400 million ($529 million) will be lopped off defense spending — three quarters of which will come from purchases.

The draft law also drastically revises the 2012 budget, changing the deficit target to 6.7 percent of gross domestic product from an initial forecast of 5.4 percent. Even worse, plans for a modest primary surplus — which excludes debt servicing costs — have been scrapped and Greece will instead post a primary deficit of nearly €500 million ($661 million), or 0.2 percent of GDP.

Parliament is expected to vote on the cuts and budgetary revisions early next week.

On Wednesday, debate will start at committee level on a separate draft law on adopting the private debt writedown. Parliament’s plenary session will vote on the draft law Thursday.

Both pieces of legislation are expected to be approved, as the interim governing coalition headed by technocrat Prime Minister Lucas Papademos controls 193 of the House’s 300 seats. But earlier this month the two coalition partners — the majority Socialists and the conservatives — were forced to expel a total 43 deputies who rebelled against new austerity cuts.

It remains uncertain whether even the combination of new bailout and writedown will be enough to save Greece, whose economy is in a fifth year of recession and could continue to shrink as the cutbacks cripple consumer spending and investment.

Werner Hoyer, the new president of the European Investment Bank, told Germany’s Handelsblatt newspaper that “Greece now needs, alongside the unavoidable austerity program, a Marshall plan too ” — a reference to the U.S. aid plan that rescued an impoverished Europe after World War II.

Story Continues →