Greece to impose deeper austerity for new rescue

Protesters stand in front of the Greek parliament during a rally against a new austerity package in Athens' Constitution (Syntagma) square June 1, 2011.

ATHENS (Reuters) - Greece is set to impose a deeper bout of austerity on its struggling economy and promise to speed up a privatization drive in return for a new international bailout to avoid a debt default.

Prime Minister George Papandreou Friday will present his side of the deal, a medium-term budget plan, when he meets the chairman of euro zone finance ministers -- the people who must stump up much of the planned new funding along with the IMF.

Senior euro zone officials meeting in Vienna agreed in principle to a new three-year program for Greece to run until mid-2014, a source close to the negotiations said.

This would effectively supersede a 110 billion euro ($159 billion) rescue Greece agreed with the European Union and IMF a year ago.

But whereas taxpayers have so far borne the brunt of rescuing Greece and fellow euro zone members Ireland and Portugal, the new deal would involve some participation of private sector investors, the source told Reuters.

Some European politicians have argued that investors who bought Greek government bonds will have to share that burden, perhaps in the form of cutting the value of their debt.

The European Central Bank has fought such an idea, fearing this could provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent reaction on financial markets far beyond Greek borders.

However, participation of private sector investors in the new deal would be limited to avoid triggering a "credit event," the source said, without providing any figures.

Athens, which is struggling to lower its budget deficit, let alone its 340 billion euro debt mountain, hasn't got a done deal yet. Anything agreed by the officials in Vienna must be approved by the euro zone finance ministers, some of whom represent electorates which are hostile to any more aid to Greece.

Papandreou starts the offensive to win political approval when he meets Eurogroup chairman Jean-Claude Juncker in Luxembourg.

"The prime minister will present the main points of the mid-term plan to Juncker, which include speedier privatizations and new measures to cut government spending and raise revenues," a senior Greek government official said.

OFFENSIVE GESTURES

Greeks are already suffering under waves of austerity imposed after Athens had to seek its first bailout from the European Union and IMF a year ago.

Thousands of protesters gathered in front of parliament on Thursday night for the latest in a series of nightly demonstrations staged for more than week. Booing and whistling, they waved their open hands at parliament, an offensive gesture in Greek culture, and shone lasers at the building.

About 20 protesters tried to attack government spokesman George Petalotis at an event of the ruling PASOK party in an southern Athens suburb late Thursday, a police source said.

They threw yoghurt and a stone toward Petalotis while he was about to take the podium, without hitting him.

The Greek government official said Athens had signed up to 6.4 billion euros in new measures to cut its 2011 budget deficit and aimed to wrap up bailout talks with a team of international inspectors by Friday.

Greece's original bailout deal has hit a problem. It assumed that Athens could resume borrowing on markets next year, using the money to fund part of its budget deficit.

But this likelihood has steadily shrunk. Wednesday, ratings agency Moody's downgraded Greece to Caa1. That put Greece -- a member of the euro zone which groups some of the most advanced economies in the world -- on a par with Cuba.

Moody's currently rates only one country lower -- Ecuador, which defaulted on $3.2 billion of debt in 2009.

Athens needs funds fast. This month it is due a fifth, 12 billion euro tranche of the old bailout loan, needed to pay 13.7 billion euros of immediate funding needs. But that money has hinged on the "troika" team of IMF, EU and ECB officials declaring it has met targets for reducing its budget deficit.

Athens has already promised to raise 50 billion euros from privatization by 2015, but not once cent's worth of assets has been sold in the past year. The government has decided to sell a further 10 percent stake in Greece's former monopoly telecoms company, but this modest sale is covered by a 2008 deal.

(Additional reporting by Paul Taylor in Paris, Angeliki Koutantou and George Georgiopoulos in Athens; Writing by David Stamp, editing by Angus MacSwan)