By Renee Maltezou and Dina Kyriakidou
ATHENS (Reuters) - Greece approved the first of two austerity measures on Wednesday despite worsening street violence, in a vote vital to winning fresh international aid so it can pay its debts on time and stave off bankruptcy.
Lawmakers voted by a clear margin for the five-year framework of $28 billion in spending cuts, tax rises and state asset sales, handing a 155-138 vote victory to Prime Minister George Papandreou.
"We must avoid the country's collapse at all costs. Now is not the time to step back," the Socialist premier told lawmakers just before the vote.
The solid margin suggested the government should be able to push through a second package of laws on Thursday, implementing the specific budget measures and asset sales. This would clear the last obstacle to release of 12 billion euros ($17.3 billion) of emergency loans from the International Monetary Fund and European Union, which are essential to meet debt payments by mid-July.
Relief that Greece could avert sovereign default buoyed financial markets. Investors moved from safe-haven assets such as U.S. Treasuries and world stocks advanced for the third straight day. The euro rallied 0.4 percent to trade around $1.4430.
But optimism was muted. It remains unclear whether the government will be able to actually implement the deeply unpopular cuts required to meet a tight schedule imposed by the EU and IMF before the next round of bailout funds are needed.
"There are still a lot of unanswered questions about the effective implementation of austerity measures, given the backdrop of increasing public anger in Greece," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The full pain of pay and benefit cuts and sharp tax increases has yet to be felt, and public anger already is boiling.
Outside parliament, there were clashes between stone-throwing masked youths and riot police, who fired clouds of tear gas from behind steel crash barriers to keep rioters at bay. Fires broke out in buildings and a party spokesman said a metro station was "a gas chamber."
One group of anarchists armed with staves and iron bars attacked finance ministry offices just off Syntagma Square in central Athens, smashing windows at the entrance and on higher floors. A post office on the ground floor of the building was set on fire, sending acrid grey smoke billowing into the sky.
In cat-and-mouse clashes with police, rioters erected makeshift barricades with benches, chairs and garbage bins on the fringes of the square, where thousands of peaceful protesters demonstrated against the austerity plan.
Chancellor Angela Merkel of Germany, Europe's reluctant paymaster and the main contributor to the bailout of Greece, was quick to praise the "brave" vote. But Finance Minister Wolfgang Schaeuble stressed the importance of "implementing these (measures) with resolve in the coming weeks, months and years."
The presidents of the European Council and the European Commission, Herman van Rompuy and Jose Manuel Barroso, said in a joint statement that Greece had taken "a vital step back from the very grave scenario of default."
However, many economists and investors still expect Greece to default in the medium term because its 340 billion euro pile of sovereign debt is so huge, about 150 percent of the country's annual economic output. A senior German ruling coalition politician, Free Democratic floor leader Rainer Bruederle, said on Wednesday that a debt restructuring was inevitable.
Despite a threat by trade unions staging a 48-hour general strike to prevent lawmakers entering the colonnaded parliament building, deputies were able to reach the chamber. Strikes and sporadic violence have not blown the government off course so far, but its approval rating has plunged in recent months.
Only one deputy in the ruling PASOK party voted against the plan and was immediately expelled from the party by Papandreou. At least one opposition deputy broke ranks with the main conservative New Democracy party and voted "yes."
In May last year Greece signed a 110 billion euro bailout deal with the EU and the IMF, which later jumped in to keep Ireland and Portugal afloat as the euro zone reeled from high government debt in the wake of the global financial crisis.
If Greece's fiscal legislation passes on Thursday, euro zone finance ministers meeting in Brussels on Sunday are expected to agree to release their part of the next aid tranche, with the IMF following on July 5.
Attention will then switch to putting together a second and longer-term rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout.
The new program would involve some 30 billion euros in private-sector participation via a "voluntary" rollover of maturing Greek debt by banks, a similar sum from Greek privatization revenues, and an expected 55 billion euros in new official funding.
Banking sources said politicians and commercial bankers were confident that credit rating agencies would accept a French proposal for a voluntary private sector rollover of Greek debt without triggering a default or a payout of credit insurance, which could have vast ripple effects in financial markets.
The agencies have made no public comment on the plan, details of which are still under negotiation. It also will need the approval of the European Central Bank, and its policymakers were cautious in their reactions. Germany's Juergen Stark rejected on Wednesday any scheme that involved EU guarantees of bonds, saying it would breach European treaty rules.
Asked about a scenario in which banks would exchange their Greek bonds for new paper guaranteed by EU states -- an approach similar to the "Brady bonds" used in Latin America in 1989 -- the ECB board member said: "This instrument is disqualified.
ECB board member Lorenzo Bini Smaghi of Italy said the plan "looks like a syndicated loan, which brings together several banks."
"It's an interesting proposal but we really need to make sure that it fits the specified framework, no credit event," he said in a newspaper interview.
Euro zone banks and insurers are considering a scheme under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's economic growth rate.
Of the other half, 30 percent would be paid back to investors in cash and 20 percent invested in a "guarantee fund" of zero-coupon AAA securities with deferred interest that might be issued by the euro zone's bailout fund, officials and banking sources said.
French banks had the largest exposure to the Greek economy, both the public and private sectors, at the end of 2010 with over $56 billion, data from the Bank for International Settlements shows. The next most exposed country is Germany.