Greece seals rescue deal, warns sacrifice needed

Those sacrifices amount to budget cuts of 30 billion euros ($40 billion) over three years, on top of measures already agreed and aimed at bringing a towering budget deficit back to the EU limit by 2014.

The government told Greeks, who have already taken to the streets in protest against the austerity drive, that they had to chose between a rescue or an economic collapse. The aid package, expected to total up to 120 billion euros ($160 billion) over three years, represents the first rescue of a member of the 16-nation euro zone and is aimed at stemming a debt crisis that has shaken markets worldwide.

Finance Minister George Papaconstantinou gave details of the agreement before heading to a meeting later on Sunday with his euro zone counterparts in Brussels, where the aid is expected to win the bloc’s formal backing.The deal’s size would be announced in Brussels but it would cover a large part of Greek borrowing needs for the next three years, Papaconstantinou told a news conference.  Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year. Salaries and pensions in the public sector would be frozen during the three-year program while a fund backed by the IMF and EU would be set up to help Greek banks. Value-added tax and duties on fuel and alcohol will rise sharply.

Papaconstantinou forecast Greece’s public debt would soar to nearly 150 percent of gross domestic product but then start falling from 2014. However, the plan would cover a large part of Greece’s borrowing needs for the next three years, with Athens returning to commercial borrowing when “appropriate.” Greece and its international backers hope the deal can prevent the crisis from spreading to other euro zone members with fragile finances such as Portugal and Spain. But Papandreou faces a Herculean task in convincing Greeks to accept draconian austerity measures at a time when the economy is already in a deep recession. On Saturday, thousands marched in May Day demonstrations in Athens shouting slogans against new budget cuts they say will hurt the poor and plunge the country into a downward economic spiral. only about 2.5 percent of the euro zone’s economic output, its woes have shaken confidence in the currency bloc and deepened global fears about sovereign debt built up during the financial crisis.

In Germany, which as the bloc’s largest economy will be expected to put up the lion’s share of the European aid, there is deep resentment about rescuing Greece, which manipulated its economic figures in order to enter the euro zone in 2001 and has lived beyond its means ever since. Chancellor Angela Merkel insisted on making the International Monetary Fund (IMF) part of any rescue and made German aid contingent on bolder austerity steps from Athens, delaying the rescue and underscoring deep divisions in the bloc.

Economists say that if the rescue agreed on Sunday fails to calm markets, European countries could end up footing a bill of half a trillion euros ($650 billion) to save several nations on top of Greece.

“The problem has grown bigger, this fire is threatening to spread and hurt Greece further and the other euro zone countries and economies,” Papandreou told the Greek cabinet. “The cost of putting it out is expected to be huge, and the burden that Greeks will shoulder is even bigger.”