Greek PM Begins Austerity Push

Greek Prime Minister George Papandreou started a campaign on Monday to secure a new international bailout by imposing years of austerity on a nation already seething over corruption and economic mismanagement.

Unease is growing within Papandreou's ranks about the consequences of waves of budget cuts demanded under successive deals with the European Union and IMF -- and this could turn into alarm after at least 80,000 Greeks crammed a central Athens square to vent their anger over the nation's dire state.

As the government struggles to prevent Greece from defaulting on its debt, the Socialist cabinet began discussing the medium-term economic plan which will impose 6.4 billion euros of extra savings this year alone.

This is the first stage of a drive to turn the plan, agreed on Friday with the EU and IMF as the price of a new financial rescue, into law despite signs of dissent in the ruling party.

Papandreou will present the plan to the political council of his PASOK party on Tuesday, before the cabinet clears it the following day and sends it to parliament.

Greece's international lenders say the new bailout package, which would replace a 110 billion euro deal agreed only a year ago, depends on Athens keeping to its promises for further austerity and accelerated privatizations.

Germany's Deutsche Telekom said it would buy an extra 10 percent of Greece's OTE telecom company from the state for about 400 million euros, taking its stake to 40 percent. However, this did not amount to a new privatization as the sale was made under a deal struck in 2008.


In Berlin, a German government spokesman said Chancellor Angela Merkel backed plans for private creditors to share in the burden of covering Greece's funding.

However, acting IMF chief John Lipsky made clear the latest plan to help Greece did not envisage any debt restructuring.

Greece's funding needs still had to be confirmed, he told reporters in London but added that new package "does not contemplate debt restructuring."

The European Central Bank opposes any attempt to cut the overall value of creditors' bond holdings, known as a haircut. It fears that any failure to repay creditors in full would provoke a crisis at weaker banks with big Greek debt holdings, leading to a violent reaction on global financial markets.

German and French banks held over two thirds of Greek government bonds in international lenders' hands at the end of last year, bank lending data showed on Monday.

While officials are playing down the chances of a default, creditors may be asked to buy new Greek bonds when old ones mature, to avoid Athens having to produce more money up front.

ECB policymaker Juergen Stark gave his cautious backing last week for a debt rollover, provided that it was not perceived as a default.

Papandreou is under huge pressure from voters who are suffering under pay and pension cuts, and soaring unemployment.

Under Greece's austerity policies, unemployment has already hit 15.9 percent of the workforce and the medium-term plan aims for a further 22 billion euros in budget steps in 2012-15.

On Sunday night, people crammed into the capital's Syntagma Square to show they are close to the limit of their endurance. Police put the turnout at 80,000, the biggest in a series of 12 nightly rallies inspired by Spain's protest movement.

Greece's first, 110 billion-euro, bailout assumed that it could resume borrowing commercially early next year. This now appears inconceivable, meaning a new package is vital.

Papandreou has used his parliamentary majority to ram through successive rounds of austerity. But faced with the popular anger, some PASOK lawmakers are becoming uneasy.

A group of 16 wrote to the prime minister last week demanding a full party debate on the medium-term plan as "a matter of patriotism and democracy."

Interior minister Yannis Ragousis warned that rocking the boat could lead to early elections. Opinion polls suggest this would produce a political stalemate, raising the risk that the new bailout deal with the EU and IMF might unravel.

"Anyone who drives the nation toward elections now will be effectively giving it the last push over the cliff," Ragousis told Sunday's edition of the Realnews newspaper.

(Additional reporting by Keith Weir and Steve Slater in London and Edward Taylor in Frankfurt; writing by David Stamp, editing by Mike Peacock)