The Tribune

GREECE'S prime minister negotiated late into the night Tuesday with the country's international creditors, finalizing a proposal for new austerity measures to avoid a disastrous bankruptcy. Prime Minister Lucas Papademos kept talking with senior debt inspectors from Greece's bailout creditors -- other countries that use the euro and the International Monetary Fund -- which meant his meeting with Greek party leaders was postponed until Wednesday. The EU and the IMF insist that Greece must pass further harsh austerity measures -- including private sector salary cuts and civil service firings -- if it is to secure a second $170 billion bailout to avoid defaulting next month and possibly leaving the eurozone. A government official said a draft agreement on the austerity deal would be finalised during Papademos' meeting with the debt inspectors and forwarded to party leaders for scrutiny early Wednesday. The impending cutbacks have angered Greek unions, who organised a nationwide strike Tuesday that stopped train and ferry services, closed schools and banks and put state hospitals on short staffing. Riot police fired tear gas in Athens to repel hundreds of anti-austerity protesters who burned a German flag and tried to break a cordon outside Parliament as they chanted "Nazis out!" The EU, the IMF and other eurozone nations have been ratcheting up the pressure on Greece, which can't repay a March 20 bond unless it gets new bailout funds. On Monday, Papademos' government caved in to creditors' demands to cut civil service jobs, announcing that 15,000 positions would be cut this year out of 750,000. The decision breaks a major taboo, as Greek state jobs had been protected for more than a century to prevent political purges. The European Union and IMF are also pressing Greece to cut the $979 monthly minimum wage to help boost the country's competitiveness. This reduction would also affect the private sector -- because private companies base their salaries on the minimum wage -- and would even affect unemployment benefits. Greece's coalition party leaders held a first key meeting on the austerity measures then postponed the second round of talks on Monday so Papademos could complete negotiations with EU-IMF debt inspectors. The leaders have already agreed to cut 2012 spending by 1.5 per cent of gross domestic product -- about $4.3 billion; to improve competitiveness by slashing wages and non-wage costs and to re-capitalise banks without nationalizing them. The details remain to be worked out. Creditors are also demanding spending cuts in defence, health and social security. Unions and employers' federations alike have deplored the measures as unfair and unnecessary. Some 10,000 people marched Tuesday against the austerity programme. Greece has been kept solvent since May 2010 by payments from a $145 billion international rescue loan package. When it became clear the money would not be enough, a second bailout was decided last October. As well as the austerity measures, the second bailout also depends on separate talks with banks and other private bondholders to forgive $131.6 billion in Greek debt. The private investors have been locked in negotiations over swapping their current bonds for a cash payment and new bonds worth 50 per cent less than the original face value, with longer repayment terms and a lower interest rate. Papademos met late Tuesday with banker Charles Dallara, who represents private bondholders in the negotiations. He also met Josef Ackermann, CEO of Germany's Deutsche Bank, and Jean Lemierre, senior adviser to the chairman of French bank BNP Paribas. Greek officials estimate private investors will take losses of about 70 per cent on the value of their bonds. Greek lenders and pension funds hold some 34 per cent of the country's privately owned debt. The EU-IMF bailout will also give the Athens $52 billion to buy shares in the Greek banks, thereby protecting them from immediate collapse. However, the bailout has to be secured for the deal with private investors to go ahead, as about $39 billion from the bailout will be used to pay investors in the bond swap deal. A disorderly bankruptcy by Greece would likely lead to its exit from the eurozone, a situation that European officials have previously insisted is impossible because it would hurt other weak countries like Portugal. But on Tuesday, the EU commissioner Neelie Kroes, in charge of the bloc's digital policies, said Greece's exit wouldn't be a disaster. "It's always said: if you let one nation go, or ask one to leave, the entire structure will collapse. But that is just not true," she told the Dutch newspaper De Volkskrant. But EU Commission President Jose Manuel Barroso quickly stepped in to counter her remarks. "We are in a very decisive moment regarding the future of Greece and the future of the euro. We want Greece in the euro," he said. "The costs of a default by Greece, the costs of a potential exit of Greece from the euro would be a lot higher than the costs of continuing to support Greece." By Nicholas Paphitis, Associated Press