Greece seals rescue deal, warns sacrifices needed

The first ever bailout of one of the 16 countries using the euro will require tax increases and salary and pension cuts for civil servants to cut the deficit to within EU limits by 2014, the Greek finance minister said Sunday. “We are called on today to make a basic choice. The choice is between collapse or salvation,” George Papaconstantinou said.

The full amount of the three-year IMF/eurozone package will be announced in Brussels after an emergency eurozone finance ministers’ meeting, where Papaconstantinou was heading after his Athens news conference. He said the amount would be “close to” widely reported figures. French and other officials have said it would be 120 billion euros ($160 billion).

Papaconstantinou said savings worth 30 billion euros through 2012 would be achieved through public service and pension pay cuts, higher taxes and streamlining government.

Annual holiday bonuses will be capped at 1,000 euros per year for civil servants and scrapped for those with gross monthly salaries over 3,000 euros, he said. Pensioners’ bonuses will also be capped at 800 euros and canceled for those paid more than 2,500 euros. Salary cuts will not extend to the private sector, as had been widely feared.

Taxes would also be increased, including further hikes on fuel, alcohol and tobacco. The top bracket of sales tax rises from 21 percent to 23 percent. Papaconstantinou said his country’s debt would reach 140 percent of GDP in 2013 and start falling from 2014, while economic output is set to contract by 4 percent in 2010 and by 2.6 percent in 2011 before it starts recovering slowly beginning in 2012.

The new austerity measures were seen as essential for the EU and IMF to unblock the rescue package, which Athens asked for last week and which will see other eurozone countries and the IMF extend loans to Greece. Germany, which has the eurozone’s largest economy and would be the largest single contributor, had been highly reluctant to release any funds without Athens implementing more harsh spending cuts.

After Papaconstantinou’s announcements, EU Commission President Jose Manuel Barroso said the new measures were “solid and credible” and that he was recommending the EU activate the rescue package. “The Commission considers that the conditions for responding positively to the request by the Greek government are met and recommends that the coordinated European mechanism for assistance to Greece be activated,” he said in a statement in Brussels.

Barroso said the aid will be “decisive” in getting Greece back on track and protect the financial stability of the 16 nations using the euro currency.

Papaconstantinou said the government hoped to be able to return to borrowing on the market soon, but that the plan would allow the government breathing space to implement its austerity program and put its finances in order. “We are confronted with international markets that do not give us the time to make the necessary adjustments,” he said. Greece has seen its borrowing costs skyrocket to more than four times those of Germany on the international market in recent weeks.

Earlier, Prime Minister George Papandreou announced his government had reached an agreement in tough negotiations with the IMF and EU on the measures. “The avoidance of bankruptcy is the national red line,” he said in a televised speech to his Cabinet. “I want to be clear to all. I have done and will do everything so the country does not go bankrupt.”

Papandreou called on Greeks to make “great sacrifices” to avoid a catastrophe, and said the country’s problematic civil service would bear the brunt. There will also be deep cuts in defense spending and hospital procurement, the prime minister said.

Greek unions planning a general strike Wednesday against the new cuts. Violent clashes broke out Saturday during anti-government protests at May 1 Labor Day rallies. “These are the harshest, most unfair measures ever enacted. That is why our reaction will be decisive and dynamic. You can’t always make the workers pay for the results of failed policies,” Stathis Anestis, spokesman for Greece’s largest umbrella union, GSEE, told The Associated Press.

Anestis indicated the union wants the EU to offer more labor protections. “We are asking all Europeans to think again: What kind of Europe do they want? What kind of society? What kind of employees?” he said.

The government will submit special emergency legislation to Parliament that was agreed upon with the EU and the IMF at a negotiating session Saturday. Parliament is expected to approve the measures by Friday. “Economic reality has forced us to take very harsh decisions,” Papandreou said, adding that “This is the only way we will finance our 300 billion euros debt.”

Some economists believe that Greece’s adjustment will be painful, but no more so than when the country devalued its then currency, the drachma, twice in the 1980s and once in the 1990s.