Greece plans tough new austerity measures

Facing a dire choice of additional pain or bankruptcy, Greece on Friday announced 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 45 billion euros ($60 billion) in loans this year and up to a reported 120 billion euros ($160 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 labour unions to mark May Day.

Pay and pension cuts

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 two 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.

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 per cent 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.

German Finance Ministry spokesman Michael Offer said Friday Athens was expected to present the austerity plan by Sunday. He said once the plan is distributed, Germany will review it and then consult with eurozone finance ministers in a conference call expected on the same day.

Germany has stressed it needs to review the plan before it can pass legislation to free its 8.4 billion euro ($11.2 billion) share of the loans.

Moody's downgrades Greek banks

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 6.2 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 review of the country's sovereign debt rating.