ATHENS, July 16 (Reuters) - Europe moved to re-open funding to Greece's stricken economy on Thursday after the parliament in Athens approved a new bailout program in a fractious vote that left the government without a majority.
The European Central Bank increased emergency funding for Greek lenders, although capital controls will have to remain in place to avoid a run on the banks when they reopen on Monday.
European Union finance ministers also approved 7 billion euros ($7.6 billion) in bridge loans to keep Greece afloat, allowing it to make a bond payment to the ECB next Monday and clear its arrears with the International Monetary Fund.
The loans will be finalized on Friday provided Germany's parliament approves a Berlin government request to open talks on a three-year bailout program - Greece's third in the past five years - worth up to 86 billion euros.
A majority of Germany's conservative lawmakers voted in favor of starting talks on a third Greek bailout in a test ballot on Thursday, the eve of a vote in the Bundestag lower house of parliament, sources in the conservative parliamentary faction said.
In the test ballot, 48 lawmakers in the conservative bloc opposed talks on further Greek aid while three abstained, the sources said.
The conservative bloc, composed of Chancellor Angela Merkel's Christian Democrats (CDU) and their Bavarian allies, the Christian Social Union (CSU), has more than 300 seats in parliament but it was not clear how many conservative lawmakers were at the test vote.
The Bundestag is expected to give Merkel's government a mandate to open negotiations, with the Social Democrats - her junior coalition partner - and some opposition parties expected to vote 'Yes'.
Riot police use teargas in front of the Greek Parliament on July 15, 2015 in Athens, Greece. (Milos Bicanski/Getty Images)
REWARD FOR TSIPRAS
The twin lifelines were a reward for Greek Prime Minister Alexis Tsipras after he won the backing of parliament in the early hours of Thursday for the tough reform measures demanded by creditors led by Germany.
Tsipras was left weakened by a revolt in his left-wing Syriza party, who voted against the measures, forcing him to rely on opposition votes to pass the package. He is expected to reshuffle his cabinet to replace four ministers and deputy ministers who rebelled.
The 40 year-old prime minister told aides the rebels had created an "open trauma" in the party but that he was committed to sticking to the deal, a government official said.
Interior Minister Nikos Voutsis said a snap election could be held in September or October, "depending on developments."
German Finance Minister Wolfgang Schaeuble, one of Greece's sternest critics, questioned whether Athens would ever get a third bailout, even after the parliamentary vote. He suggested its financing needs were spiraling and a debt "haircut" or write-off - outside the euro zone - might be a better solution.
"We will now see in the negotiations whether there is even a way to get a new program, taking into account financing needs, which have risen incredibly," Schaeuble told Deutschlandfunk radio.
After meeting with SPD politicians in Berlin, Eurogroup President Jeroen Dijsselbloem said he would like discussions about a possible Greek exit from the euro zone to stop and he hoped German lawmakers would support opening talks on further Greek aid in the parliamentary vote on Friday.
Dijsselbloem, who is also Dutch finance minister, said he hoped the German Bundestag lower house of parliament would offer "a lot of support" for that agreement in its vote on Friday and said this was crucial for legal and political reasons.
The move by the Greek parliament was enough to persuade the ECB to raise Emergency Liquidity Assistance (ELA) for the banks by 900 million euros for a week to nearly 90 billion euros.
"Things have changed now," ECB President Mario Draghi told a news conference in Frankfurt. "We had a series of news with the approval of the bridge financing package, with the votes, various votes in various parliaments, which have now restored the conditions for a raise in ELA."
Draghi said it was difficult to make decisions on Greece given the constraints of an ELA program which was never meant to provide unlimited and unconditional support for a banking system facing a major overhaul.
Deputy Finance Minister Dimitris Mardas said the ECB support would allow banks to re-open, three weeks after they were closed when Athens imposed capital controls to prevent a flood of withdrawals collapsing the banking system. "All the banks everywhere will be open," he told state television.
Cash withdrawals, currently limited to 60 euros a day, are likely to remain restricted.
A protester wearing a gas mask attends an anti-austerity protest outside the Greek parliament in Athens on July 15, 2015. (ANDREAS SOLARO/AFP/Getty Images)
Finnish and Lithuanian lawmakers on Thursday gave their approval to begin negotiations.
Schaeuble said he would vote to open talks but underlined the risks still surrounding the negotiations that will be conducted over the next few weeks.
After a warning from the IMF this week that Greece's massive public debt could not be managed without a significant writedown, Schaeuble said a debt haircut was incompatible with euro membership and would mean Greece would have to leave the euro, at least temporarily. "But this would perhaps be the better way for Greece," he said.
European finance ministers said after a conference call on Thursday morning they agreed "in principle" to start talks with Greece on the new bailout and called on Athens to adopt a second set of reforms by July 22.
All 28 EU countries are expected to contribute to the bridge loan, despite reluctance of non-euro members such as Britain and the Czech Republic, after a compromise was found to use euro zone funds to guarantee their ring-fenced contributions.
Britain accepted the deal after receiving what its finance minister, George Osborne, said was a legally binding deal to protect any British money used in the loan.
The Greek parliament comfortably approved the agreement Tsipras struck on Monday with the euro zone that demands austerity measures and economic reforms tougher than those rejected by voters in a July 5 referendum.
Some of the main measures, including an increase in value-added tax, take effect immediately, although it will be extended to hotels in October after peak tourist season.
But 32 of the 149 lawmakers from Tsipras's radical left Syriza party voted against the plan while six effectively abstained and one was absent, meaning he had to rely on opposition votes.
The dissidents also included the speaker of parliament and ex-finance minister Yanis Varoufakis, who compared the Brussels deal with the 1919 Versailles Treaty that imposed ruinous reparations on a defeated Germany after World War One.
"FORCED TO ACCEPT"
Tsipras told lawmakers he had accepted a package he did not believe in and which would harm Greece, but the alternative was a disorderly bankruptcy that would be catastrophic.
"I acknowledge the fiscal measures are harsh, that they won't benefit the Greek economy, but I'm forced to accept them," he said before the vote.
However his position as prime minister faces no serious internal challenge and there has been little pressure to form a national unity government from the pro-European opposition parties that voted for the bailout.
How long the government will remain in office is unclear. "It is very possible that elections take place in September or October, depending on developments," Interior Minister Voutsis said according to the text of an interview with Sto Kokkino radio released by his office.
The IMF highlighted the issue of debt relief in a report released this week, saying the only alternatives to "deep upfront haircuts" would be for European creditors to grant Athens a 30-year debt service holiday on present and future loans or make large annual fiscal transfers to the Greek budget.
All those options are unpalatable to German and other euro zone creditor governments that do not want to tell their taxpayers that money lent to Greece is not coming back.
Klaus Regling, head of the euro zone's bailout fund, said he expects it to contribute 50 billion euros to the third bailout.
The rest would come from 16 billion euros in remaining undisbursed IMF funds, once Athens has cleared the arrears, as well as privatization receipts and possible limited borrowing on financial markets near the end of the three-year program. ($1 = 0.9195 euros) (Additional reporting by John O'Donnell in Frankfurt, Jan Strupczewski in Brussels, Padraic Halpin in Dublin, Caroline Copley in Berlin; Michele Kambas in Athens; Writing by Paul Taylor and James Mackenzie; Editing by Peter Graff, Toni Reinhold)
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