Greece says will stay the course, despite GDP slump

By Harry Papachristou

THESSALONIKI, Greece (Reuters) - Debt-laden Greece's government vowed on Saturday to stay the course of austerity, sending a message to its increasingly frustrated lenders it will do everything it takes to avoid a bankruptcy that would rock the euro.

Anger at the country's failure to meet fiscal targets under its EU/IMF bailout has reached boiling point, prompting senior euro zone policymakers to cast doubt on its ability to avoid default or even membership of the single currency.

But Finance Minister Evangelos Venizelos countered the talk, telling its lenders his government remained fully committed to its bailout plan.

"We are absolutely determined, without weighing any political cost, to fully meet our obligations to our institutional partners," he said in a speech in the northern city of Thessaloniki.

Venizelos pledged to further cut the civil service payroll, push privatizations and deepen labor market reform.

"If these things don't change, we won't survive, we won't get out of the crisis," he told business people in a conference.

Civil servants, who have already seen about a fifth of their wages slashed, will suffer more after the government decided to put thousands of them in a so-called "Labour Reserve," in which they will draw 60 percent of their salary and possibly face dismissal if they find no other public sector job within a year.

"We must prove wrong all those who say that Greece is incapable, or unwilling, or a pariah, or doesn't deserve to be in the euro," Venizelos said.

But austerity measures are throwing the economy into an ever deeper recession. GDP will shrink by more than 5 percent this year, Venizelos said, topping earlier projections in its third straight year of contraction.

PUBLIC DISCONTENT

Recession is breeding public discontent and thousands of disgruntled civil servants, students, taxi drivers, and even football fans, are expected to march later on Saturday in Thessaloniki.

The protests are scheduled to coincide with a major economic policy speech by Prime Minister George Papandreou at the Thessaloniki Trade Fair, the country's biggest economic event.

Taxi drivers have called a 24-hour strike. Thessaloniki restaurant owners said they would shut down on Saturday to protest a VAT hike that took effect earlier this month.

"We are suffering an unprecedented tax raid... we deeply worry about tomorrow," George Kasimatis, Chairman of Greece's Chamber of Commerce Federation, told Venizelos during the conference.

Police presence is felt throughout the city, with about 6,000 officers patrolling the streets on foot or motorbike. Three people were detained for carrying face masks.

Papandreou, who was heckled by protesting labor unionists in Thessaloniki on Friday, avoided walking through the fairgrounds in the morning, as prime ministers usually do on the event's first day.

While vowing to keep its side of the bargain, the Greek government sharply criticized its EU partners for delaying ratification of a second, 109-billion-euro bailout for the country, agreed by euro zone leaders on July 21.

"Europe must rise to the challenge and move toward implementing the July 21 decisions, to put an end to the Sissyphean ordeal the Greek people is going through," said Development Minister Mihalis Chrysohoidis.

"Doing nothing is disastrous for all of us," he added.

A G7 source said the troika (EU/IMF/ECB), which suspended talks with Athens last week in frustration at Greece's struggle to stick to its deficit reduction plan, would probably come up with a form of words in its next report to allow the next tranche of bailout funds to be paid.

But the working assumption is now that Greece will not avoid default indefinitely.

However, a bond swap plan for private bondholders, which is part of the second bailout plan and is supposed to ease Greece's debt payments was progressing well, Venizelos said.

"The private sector is responding very well to the PSI (private sector involvement)," he said without elaborating, one day after an initial deadline for banks to express interest in the scheme expired.

(Additional reporting by Yannis Behrakis; Editing by Toby Chopra)