Greece's Parliament late on Tuesday approved new cuts in public sector pensions and government spending required to secure a second package of international rescue loans.
Lawmakers voted 202-80 in favor of cutbacks worth a total euro3.2 billion ($4.31 billion) and aimed at bringing the 2012 budget back in line with targets. Lawmakers from both parties in Prime Minister Lucas Papademos' coalition, the majority Socialists and the conservatives, backed the legislation.
Earlier, the debt-crippled country's Cabinet decided to apply recent labor reforms, including deep cuts to the minimum wage, retroactively to Feb. 14.
Greece is obliged to adopt a series of austerity measures and reforms before it can receive any funds from its new euro130 billion ($174 billion) package of rescue loans from other eurozone countries and the International Monetary Fund.
The bailout, and accompanying bond swap deal with private creditors, are meant to save the country from a potentially catastrophic default in late March that could drag down other financially vulnerable countries and threaten the European Union's joint currency, the euro.
The rescue package is Greece's second in less than two years. The country has been surviving since May 2010 on funds from a first bailout from the eurozone and IMF, and has received euro73 billion ($98 billion) from the initially approved euro110 billion ($147 billion) package.
But more than two years of harsh austerity implemented to secure the rescue funds have taken a hefty toll on the recession-bound Greek economy, with businesses closing in the tens of thousands and unemployment at a record high 21 percent.
"It is dramatic to cut someone's pensions. ... But why do we have to take these measures? Because our budget is still running at a loss," Finance Minister Evangelos Venizelos said in Parliament. "We are still adding debt to our debt. And if we do not start to generate a primary surplus next year, that will be catastrophic."
The newly approved legislation imposes nearly euro400 million ($538 million) in cuts to already depleted pensions.
Health and education spending will be reduced by more than euro170 million ($229 million), subsidies to the state health care system will be cut by euro500 million ($673 million), and health care spending on medicine will fall by euro570 million ($767 million).
Furthermore, some euro400 million ($538 million) will be lopped off defense spending -- three quarters of which will come from purchases.Measures approved by Papademos' Cabinet earlier Tuesday include a 22 percent cut in the minimum salary, currently at euro751 ($1,010) per month, for private sector workers, and a 32 percent cut for workers under the age of 25, where the rate of unemployment is nearly 50 percent.
The law also revises the 2012 budget, changing the government deficit target to 6.7 percent of gross domestic product from an initial forecast of 5.4 percent.
Limits also are being imposed on collective wage agreements and the process of labor arbitration, with some measures to remain in effect until overall unemployment falls below 10 percent.
Lawmakers are to vote again on Wednesday on another bill implementing cuts that have previously been announced.
The new wave of austerity measures have sparked widespread anger among a public that has seen its income and living standards drop with no clear end to the crisis in sight.
On Tuesday, about 100 uniformed police, coast guard and fire service unionists protested pay cuts outside Parliament, with a small group burning a wartime military German flag used in the Nazi era in 1935-1945. While Germany is a major contributor to both Greek bailouts, Berlin's insistence on an austerity-based cure for the country's financial woes has angered many Greeks.
Papademos, a technocrat heading Greece's temporary coalition government, is to head to Brussels for a meeting Wednesday with European Commission chief Jose Manuel Barroso.
Greece's European partners have been pressing the country to implement the measures it has already passed, after repeated delays and missed targets over the last two years eroded trust in the ability of Greece's politicians to stick to their pledges.
European Parliament President Martin Schulz was in Athens on Tuesday for a series of meetings, and he gave a speech in Parliament stressing that "Greece must remain in the euro."
"We must do everything we can to prevent the collapse of the euro," he said, adding that more emphasis must be put on measures to promote growth rather than only on cutbacks.
"A policy based solely on austerity spells economic disaster," he told Greek deputies.
"Budgetary prudence is certainly essential (but) ... there is too much focus on financial penalties and austerity packages," Schulz said, adding that economic growth could be stifled in many European countries.
"How are countries whose economies are at a standstill, which are facing a recession, supposed to pay off their debts? Greece has already paid a high price. It cannot go on paying," he said.
On Monday, the Standard & Poor's ratings agency downgraded Greece's credit rating to "selective default" over a debt writedown deal with private creditors that is an integral part of the second bailout.
The downgrade had been widely expected, as ratings agencies had said the bond swap with private creditors, which seeks to cut euro107 billion ($144 billion) off Greece's debt, would constitute a selective default. Once the swap is carried out next month, the agencies are expected to upgrade Greece.
Late Tuesday, the International Swaps and Derivatives Association said it has accepted for consideration a question relating to a potential credit event with respect to Greece. An ISDA statement said a meeting will be held at 1100GMT on Thursday to determine whether a credit event has occurred.
The decision by the New York-based trade association, which represents hundreds of banks and other companies, will ultimately determine whether the bond swap will trigger payment of insurance taken by investors against a Greek default.
I doubt ISDA will declare a credit event. Even if it does, who will make this a binding decision? In my opinion, all this talk of 'credit event' has been blown out of proportion (listen to interview below).
Greece is bankrupt, has been for some time now. It's not just financially bankrupt but morally bankrupt. My uncle reminds me that the crisis is more than just economic, it's social and moral. He's right. For years corrupt politicians, civil servants and business people milked the system for all they could and now all Greeks are paying a heavy price.
Below, Moorad Choudhry, head of treasury the corporate banking division at RBS , tells CNBC, "the markets seem to have subtly moved faintly positive that this latest euro zone bailout is a step in the right direction, so the sentiment has moved slightly from less negative to what it was pre the latest bailout, now looking at the long term Greece will need cash transfers for some time to come but for the time being it is going the way the euro zone politicians would like it to."