ATHENS, Greece — Facing a dire choice of additional pain or bankruptcy, Greece on Friday heralded drastic new cuts and tax increases to win rescue loans from its European partners and the International Monetary Fund – and avoid a disastrous default on government debt.
Prime Minister George Papandreou said cuts are inevitable if the country is to keep afloat.
"The measures we must take, which are economic measures, are necessary for the protection of our country. For our survival, for our future. So we can stand firmly on our feet," Papandreou said in parliament.
Greece, the EU and the IMF are expected to complete talks this weekend over what extra steps Athens must take as a condition of the rescue, which would provide euro45 billion in loans this year and up to a reported euro120 billion over three years.
Papandreou is widely expected to detail the cuts on Sunday, the day after a mass protest rally planned by the country's biggest labor unions to mark May Day. Officials briefed on the negotiations say the measures will include a further slash in civil service pay, as well as state and private sector pensions, and a new hike in indirect taxes, including a 2 percentage point increase in sales tax.
"It is a patriotic duty to undertake this, with whatever political cost, which is tiny faced with the national cost of inaction ... and indecision," Papandreou said.
Once an agreement is in place, Germany – which, as the largest EU contributor, has insisted on strict conditions for releasing the aid – is expected to quickly push the issue through parliament so Greece can get the money to pay debts coming due May 19.
German Finance Ministry spokesman Michael Offer said once the plan was announced, Germany would review it and consult with eurozone finance ministers in a conference call. Berlin has stressed it needs to review the plan before it can pass legislation to free its euro8.4 ($11.1) billion share of the loans.
Greek Finance Minister George Papaconstantinou said an agreement was "very close" and that once negotiations were concluded, there would be "a simultaneous announcement of the basic elements of this program as well as the all the financing mechanism so that Greece has no immediate borrowing problems – and I am sure it will not – but more importantly, so we can carry out the major reforms without the ... angst of the daily market fluctuations."
Speaking at an economy conference, Papaconstantinou said the three-year program was "the greatest fiscal reform that has ever taken place in Greece. It is a difficult adjustment that will call on everyone to undertake a great effort."
He insisted that the Greek banking system would be "shielded against any attack" in the reforms.
A default would be a serious blow to the euro currency and could hit Greek and European banks that invested in Greek government bonds. The bailout is designed to prevent that and to keep the Greek crisis from spreading to other countries that use the euro.
Greece spent freely for years and ran up debt equal to 115 percent of gross domestic product. It has been effectively shut out of bond markets to refinance its debt pile because investors fear default and are demanding high rates of interest the government says it cannot pay.
Signs that the help will soon be approved have calmed markets, which previously pushed Greece's cost of borrowing to untenably high levels high as EU and German officials showed little urgency in addressing the problem.
On Friday the interest rate gap, or spread, between Greek 10-year bonds and their benchmark German equivalent narrowed to 6.20 percentage points, from a staggering 10 points Wednesday.
But Athens was in for more bad news as credit agency Moody's Investor Services downgraded the debt rating of nine Greek banks: National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Emporiki Bank of Greece, Agricultural Bank of Greece, General Bank of Greece, Marfin Egnatia Bank and Attica Bank.
Moody's said the banks' might face further downgrades – a move that would come alongside Moody's ongoing review of the country's sovereign debt rating.
On Thursday, the agency confirmed that it is awaiting to see details of an EU-IMF rescue package before a possible revision of Greece's credit rating, but that a "multi-notch downgrade" remained likely.
Earlier this week, another ratings agency, Standard & Poor's, downgraded Greek bonds to junk status.
Citigroup chief economist Willem Buiter said the rescue cash would give Greece breathing space, but an eventual debt restructuring – a lengthening of repayment deadlines and cuts in the capital to be returned – appeared inevitable.
"In my view, sooner or later there will have to be a restructuring of the public debt," he told a conference in Athens. "It won't happen here anytime soon now thanks to the three years of financial support that have been added ... so the immediacy of the solvency crisis has been kicked over a three-year horizon."
He said the problems would probably last for a decade.
"In Greece there is two options, pain or default, or what I call a slight combination of the two, pain and restructuring with external support from your European partners and your friends in Washington," Buiter said.
Citigroup's Buiter castigated what he called "dithering and shameful brinkmanship" by Greece's EU allies, which if repeated, could lead to "a nasty, unintended default."
"But if we use collective brains we won't," he added, and expressed optimism that the 16-member eurozone will weather the storm.
"I don't think that any of this threatens the eurozone, except possibly the risk of what I call a soft bailout, that conditionality is not enforced and the Germanies of this world after 5 or 10 years of filling a black hole – in Greece and possibly elsewhere as well – will walk out in disgust," Buiter said. "I don't think that is going to happen."
Associated Press writer Elena Becatoros in Athens contributed.