Protests escalate as Greece secures rescue

Greece is poised to announce an agreement with euro-region allies and the International Monetary Fund on a €120 billion ($219 billion) bailout as protests mount against budget cuts that are a condition for the rescue of the debt-stricken nation.

Prime Minister George Papandreou called a special Cabinet meeting last night and Euro-area finance ministers met overnight to approve their part of the three-year lifeline to be financed with the IMF.

With national debt of almost €300 billion and its credit rating cut to junk status, Greece faces a fiscal mess that has begun to spread to Spain and Portugal, forcing the European Union to orchestrate the rescue. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving fiscal policy in national capitals.

"I hope the aid package is enough," Finnish economy minister Mauri Pekkarinen said. "It's very important for our common currency that they manage their problems."

As talks with the EU and IMF on the terms of the loans wound down in Athens, more than 15,000 demonstrators took to the streets of the capital on Saturday, turning traditional May Day celebrations into protests against austerity measures that will accompany the aid.

Papandreou, who needs the funds to avoid default, said last week Greece's very survival was at stake.

Papandreou has already raised taxes, cut wages and reduced Government spending in a bid to tame a deficit that reached 13.6 per cent of gross domestic product last year, more than four times the EU limit.

Those measures prompted the euro region to commit to making €30 billion available to Greece in the first year of the package, with the IMF due to provide another €15 billion initially.

That austerity plan also triggered a wave of strikes and protests across Greece. Unions plan another general strike for May 5.

Papandreou's Government may have agreed to additional budget cuts worth €24 billion, or around 10 per cent of GDP, to secure the second and third year of the aid, Greece's NET Radio said.

Measures may include a three-year wage freeze for public workers and the elimination of two of their 14 annual salary payments, the ADEDY union said after a briefing with Papandreou on the talks.

Finance Minister George Papaconstantinou said Greeks must brace themselves for unprecedented austerity and they face "a critical point in the history of our country".

Most Greeks feel anger and fear rather than relief over the bailout, an opinion poll showed. Just 14.8 per cent of the 1256 people surveyed by Kappa Research for the poll published in To Vima newspaper felt relief or hope after Papandreou's April 23 decision to request aid, compared with 31 per cent who answered "anger", 30.6 per cent who said "disappointment or fear" and 22.8 per cent who responded "shame".

As the talks with the EU and IMF dragged on, Greece's fiscal crisis rippled through Europe, sending the euro to its lowest in a year on April 28 and leading to a surge in the borrowing costs of other high-deficit countries.

On April 27, the same day Standard & Poor's cut Greece's credit rating to below investment grade, the company also downgraded Portugal and Spain the following day.

Disbursing the funds quickly is critical as the Government faces €8.5 billion in maturing bonds this month.

The surge in Greek yields - its two-year note yielded more than 20 per cent last week - has made tapping financial markets unsustainable.

Markets rebounded on signs an agreement to disburse the aid was near; Greece's ASE benchmark general index rose 2.2 per cent on April 30, extending a 7 per cent gain the previous day.

The yield on Greek 10-year government bonds, which jumped to 11.406 per cent on April 28, slipped to 9.45 per cent. The euro, which has lost more than 7 per cent this year as the Greek crisis tested the single currency's credibility, also gained 0.5 per cent to $1.3294.

French finance minister Christine Lagarde said she was confident there would be a final agreement on a three-year aid package worth €100 billion to €120 billion. The euro area has said it would fund two-thirds of the total.

Once the Greek Government and euro-region finance ministers sign off, a further test will come when some euro-area countries push for domestic approval of the loans.

Public opposition to the Greek bailout is running high in Germany, which will have to put up €8.4 billion in the first year, almost 30 per cent of the euro-region total for this year.

Even if the package does spare Greece having to tap the markets for funds, the austerity measures will deepen a recession, complicating efforts to trim the deficit by more than 10 percentage points of GDP and reduce debt.

Greece's debt was 115 per cent of GDP last year, second highest in the EU after Italy.

"There is a very real possibility that at the end of two or three years, Greece will still have an unsustainable debt and will have to restructure because it will have a deep, deep recession," said Barry Eichengreen, economics professor at the University of California, Berkeley.

- BLOOMBERG