Greece readies austerity measures

Greece readied severe austerity measures on Thursday to secure a multi-billion-euro aid package and avoid debt default, providing relief to financial markets but drawing threats of a mighty battle from unions.

Union officials said the International Monetary Fund had asked Athens to raise sales taxes, scrap bonuses amounting to two extra months of pay in the public sector, and accept a three-year pay freeze.

They want Greece to cut the deficit by 10 percentage points in 2010 and 2011 ... so that Greece can go back and borrow on markets in the third year of the program, said a union official who requested anonymity.

IMF, European Union and European Central Bank officials are in Athens to negotiate the bailout and hope to wrap up a deal within days in an effort to prevent the debt crisis from sinking other fragile EU countries.

German politicians have said the Greece package could be worth 100-120 billion euros ($133-160 billion) over three years, against an original plan for 45 billion euros of aid in 2010.

The immediate emergency measures will be a strong bridge to cross over to great changes, secure the life of every citizen and have dynamic growth in a more just society, Greek Prime Minister George Papandreou said.

We will do whatever it takes to save the country.

Germany has expressed deep reservations about handing over loans to a profligate Greece, which previously misled partners over its catastrophic finances, and is demanding fierce budget rigor in return for any cash.

But German Finance Minister Wolfgang Schaeuble said there was no alternative to aiding Athens to protect the euro.

We have to go this route, he said in Berlin on Thursday.

We are not defending Greece, we are defending the stability of our currency.

Fears have grown of the contagion spreading to other indebted eurozone countries. We want to limit the crisis to Greece, said German Economy Minister Rainer Bruederle.

Economists said euro zone states could end up footing a bill of half a trillion euros ($650 billion) to save several nations if they failed to engineer a Greek bailout that calmed markets.

Ilias Iliopoulos, general secretary of Greek public sector union ADEDY, met the prime minister to discuss the salvage plan.

We realized we stand before a done deal, he complained afterwards. This will acutely burden people and, what is worse, unfairly.

Police fired tear gas to disperse hundreds of protesters outside the Greek finance ministry.

Sources familiar with the aid talks said officials were expected to announce details of a three-year package by Monday, ending months of uncertainty. That was enough to spark a relief rally in markets fearful of contagion across the eurozone.

The euro rose, peripheral euro zone bond yield premiums eased and costs of insuring risky debt fell on hopes an accord was imminent. European and U.S. shares rose.

Germany's largest opposition party, the Social Democrats (SPD), said it was ready to move quickly to support the Greek package, but that it also wanted banks to help out.

CLOSING RANKS

The gravity of the Greek crisis became apparent weeks ago. But EU leaders were slow to react, promising vaguely to help but only really acting when markets dived and other heavily indebted nations, like Portugal and Spain, were threatened.

French President Nicolas Sarkozy insisted on Thursday that France and Germany were working in tandem to resolve the crisis.

We're in perfect agreement, he said on a trip to China, adding that Greece's economic plan was perfectly credible.

Unions have called a series of strikes in the days ahead.

It's a disaster! The government has crossed the line. We can't live this way, said Despina Spanou, a member of ADEDY's board. We will fight these measures with all our might, because this is a battle for survival.

Opinion polls show most Greeks object to the involvement of the EU and IMF and two-thirds believe there will be unrest.

But local markets appeared confident the deal would work. The Athens bourse's banking index jumped more than 13 percent, rebounding from losses in previous days, and the general Athens index gained 7.14 percent.

Some of the aid to Greece will come from the IMF but the bulk would have to come from other euro zone countries, many of which are struggling with their own spiraling deficits, and it was not clear how they would finance such a deal.

TRICHET CALLS FOR NEW RULES

Concerns over the Greek crisis prompted global investors to cut back holdings of euro zone government bonds, although no such flight has yet to occur with the region's stocks, Reuters polls showed.

ECB President Jean-Claude Trichet called on Thursday not just for a deal on Greece, but also a revamp of Europe's fiscal rules and more intense surveillance of governments' finances.

The weak points of past multilateral surveillance will be corrected, and the Stability and Growth Pact will be reinforced and rigorously applied in its letter and in its spirit, Trichet said in a speech at the Munich Economic Summit.

Ratings agency Standard & Poor's cut Spain's credit rating on Wednesday, a day after downgrading Portugal and slashing Greece to junk status.

Spooked by the cut, Portugal announced it would speed up its austerity strategy and said this might allow it to reduce its deficit more than expected in 2010.

Meanwhile, a successful Italian bond sale seen as the first of the euro zone peripheral issuers to be tested after the S&P downgrades may have eased fears of a contagion.

This is a big vote of confidence from the market, Peter Chatwell, Rate Strategist at Credit Agricole, said.

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(Additional reporting by Dave Graham in Berlin, Jo Winterbottom in Milan, Jason Hovet in Prague and Renee Maltezou in Athens; writing by Crispian Balmer, Noah Barkin and Andrew Roche; editing by Mark Heinrich)