Greece: EU denies it has Plan B but officials say talks underway

EU denies it has Plan B but officials say talks underway

* A "no" would cause political chaos, maybe early elections

* But EU would look to tide Greece over, shore up banks

* It wants to ramp up pressure on Greek lawmakers

* Increasingly likely parliament will approve austerity

By Daniel Flynn and Renee Maltezou

ATHENS, June 28 (Reuters) - The Greek parliament appears increasingly likely to approve vital austerity steps this week, but even if it votes against them, other euro zone states are unlikely to let Athens stumble into a disorderly default on its debt.

A "no" in Wednesday's ballot on a five-year austerity programme, or in Thursday's vote on legislation to implement it, would not only cut Greece off from a vital 12 billion euro tranche of international aid but also trigger political chaos inside the country.

With the conservative opposition having rejected calls for a national unity government, Socialist Prime Minister George Papandreou would probably be forced to call early elections.

It would almost certainly take weeks to form a new government, and there would be no guarantee that a new parliament would deliver the "yes" votes that are conditions for the aid. Greece has said it needs the aid by mid-July to avoid defaulting.

The European Union's Economics and Monetary Affairs Commissioner, Olli Rehn, warned on Tuesday that there was no 'Plan B' if Greece failed to pass the laws.

But behind the scenes, EU officials say discussion has been going on for weeks to ensure that Greece gets enough money to tide it over regardless of the result of the votes. The aim is to prevent financial market instability from spreading to other weak economies -- Ireland, Portugal and Spain -- and to Europe's banking system.

"We cannot allow Greece to go into the abyss," one EU official source told Reuters.

BANKS A PRIORITY

With the governments of countries including Germany, Finland and the Netherlands frustrated by weeks of political wrangling in Athens, EU officials have been trying to convince Greek politicians this is their last chance to satisfy international donors, sources say. Hence Rehn's tough tone on Tuesday.

Some EU officials hope the tough stance could prompt Greek legislators, if they initially vote "no", to organise an emergency vote and pass the austerity steps before a meeting of euro zone finance ministers decides on Sunday whether to disburse the aid.

Failing that, the EU would seek to come up with some form of financing to keep Greece afloat until the Greek parliament could be persuaded to pass an austerity plan acceptable to the EU and the International Monetary Fund.

The sources said some options, such as an EU bridging loan for Greece, had been ruled out. One option might be bilateral loans from individual governments or other institutions, possibly outside Europe.

Chinese Premier Wen Jiabao, visiting Germany on Tuesday, repeated that his country was willing to give Europe a "helping hand" in its debt crisis. However, relying solely on Chinese aid would be politically embarrassing for Europe.

The EU is also discussing plans to recapitalise banks to insulate them against the impact of a potential Greek default, based on the results of a second, stricter round of stress tests of the health of European banks. The results of the tests are due in mid-July.

It is conceivable that even without aid, Greece could roll over some 4.4 billion euros of three- and six-month Treasury bills due to mature on July 15 and 22, but it is expected to be unable without aid to redeem 5.9 billion euros of five-year bonds it has falling due on Aug. 20.

"The financial experts, the central bankers, the ECB (European Central Bank) people have to work out their scenarios for practically all variations of economic life, but we politicians do well to encourage the Greeks to do what they have to do," Austrian Chancellor Werner Faymann said on Tuesday.

INCREASING OPTIMISM

There are some signs that the EU's tough talks is working. Greece's centre-right newspaper Kathimerini warned politicians against testing the nerve of the country's European partners.

"No one can be this irresponsible, accepting to toy with the scenario of the country's uncontrolled bankruptcy," it said.

While Greek protestors clashed with police in Syntagma square outside parliament on Tuesday, optimism was growing that within the 300-seat chamber, Papandreou would achieve the 151 votes he needs to approve each of the laws.

Three members of his PASOK party, which has a slender majority with 155 seats, had appeared to waver in recent days. But even members of the conservative New Democracy opposition party told Reuters on Tuesday they expected the laws to pass.

"The government is going to pass the vote quite easily, probably not just with the votes of all of the PASOK legislators, but also with some of the opposition," said Costas Panagopoulos of pollster ALCO.

"It's going to be much easier than it appeared a couple of days ago."

New Democracy leader Antonis Samaras has insisted that if the measures are not approved, Greece should go back to the EU and IMF to renegotiate new terms -- which could take months.

To win over party doubters, new Finance Minister Evangelos Venizelos, appointed in a reshuffle this month, promised to reopen talks on unpopular tax increases, once the payment of the 12 billion euro loan tranche has secured funding until September. That appeared to be enough to appease some critics in his party.

"We will make a move to save the country, while recognising that the measures are problematic and unfair, in order to gain time and solve the problem," said Odysseas Constantinopoulos, a PASOK deputy who has strongly criticised the austerity package.

"European citizens should recognise and support our efforts. We want to live together, as a family." (Additional reporting by Luke Baker and Julian Toyer in Brussels, Edward Taylor in Frankfurt and Michael Shields in Vienna; Writing by Daniel Flynn; Editing by Andrew Torchia)

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