By Lefteris Papadimas and Renee Maltezou
ATHENS (Reuters) - Greece's cabinet approved a sweeping new austerity program on Wednesday, the third in as many months, intended to rein in a bulging budget deficit and secure European financial support.
A government spokesman said the package of public sector pay cuts and tax increases would save an extra 4.8 billion euros ($6.5 billion), equivalent to 2 percent of gross domestic product.
"We are now justifiably expecting EU solidarity," Prime Minister George Papandreou said in a televised conversation with President Karolos Papoulias, adding that the additional steps were necessary for the country's survival.
The measures included an increase of value added tax by 2 percentage points to 21 percent, cutting public sector salary bonuses by 30 percent, increases in tax on fuel, tobacco and alcohol, as well as freezing state-funded pensions this year.
Greece is under pressure from the European Union and financial markets to fulfill a promise to cut the budget deficit to 8.7 percent of GDP this year from 12.7 percent in 2009. But EU inspectors estimated the austerity plans announced so far would only go half-way due to a deeper than forecast recession.
Papandreou told the cabinet that if the EU did not provide financial support now, Greece had the option of turning to the International Monetary Fund, a minister said after the meeting.
Speaking to members of his PASOK party on Tuesday, Papandreou compared his country's fiscal crisis to a war and said he would have to take harsh and possibly unfair measures.
All of Europe would be threatened, he said, if Greece failed to take brave decisions to cut a 300 billion euro debt mountain, equivalent to 125 percent of the country's annual output.
The euro rose on foreign exchange markets on the news and Greece's borrowing costs fell further, with the risk premium on Greek 10-year bonds over benchmark German bunds at 289 basis points, the lowest since early February. [nLDE6220H0]
"The relief was evident in the money markets once Greece announced its additional austerity measures. This ... increases their chance of navigating through these troubles," said Peter Chatwell, rate strategist at Credit Agricole CIB.
"SOCIAL EXPLOSION"
The main public sector trade union, which has called another one-day strike for March 16, vowed to fight the new measures.
"We will be on the streets with all our might. I am afraid there will be a social explosion," its general secretary, Ilias Iliopoulos, told Reuters. "People will start going hungry soon."
About 500 pensioners rallied in central Athens and marched to the finance ministry in a first protest against the new measures. Civil servants also planned an anti-austerity demonstration outside the ministry. Opinion polls suggest the government retains majority support for its austerity plans.
Papandreou is due to travel to Berlin on Friday to meet German Chancellor Angela Merkel, who had demanded additional fiscal steps from Greece before considering any European financial safety net for the euro zone's weakest economy.
In a first reaction, Germany's economy minister, who has accused Greece of endangering the euro, welcomed the latest measures, adding it was essential that they be implemented.
Greece needs to borrow or refinance some 53 billion euros this year, including 20 billion between April 20 and end May.
European government sources have said Germany and France are working on contingency plans under which state-owned financial institutions would directly purchase billions of euros in Greek bonds or offer guarantees to commercial banks that bought them.
Two of the three major credit ratings agencies, Standard & Poor's and Fitch, have downgraded Greece's public debt to below A grade. If Moody's follows suit, Greek government bonds would no longer be eligible as collateral for European Central Bank lending from the end of this year.
"UNACCEPTABLE"
ECB governing council member Ewald Nowotny challenged that situation on Tuesday, without saying how it could be changed.
"The fate of Greece, and if you are going to be more dramatic, the fate of Europe, depends on the judgment of one rating agency. That is an unacceptable situation," the Austrian central banker said at a panel discussion in Vienna.
In his speech on Tuesday, Papandreou said Greeks should not be lulled into thinking a government default was a "remote nightmare scenario," saying new holes in the budget deficit were appearing on a daily basis.
Although market pressure on Greece has eased in recent days, a Reuters poll of economists showed on Tuesday that skepticism about the government's ability to meet a goal to slash its deficit by four percentage points this year still runs deep.
Only 18 of 47 respondents said they believed Athens would meet that target, with most predicting a "slow burn" scenario through 2010 in which the government makes only limited progress in reducing the deficit.
(Additional reporting by George Georgiopoulos and Dina Kyriakidou in Athens, George Matlock in London and Boris Groendahl in Vienna; Writing by Paul Taylor; Editing by Ruth Pitchford and Patrick Graham)
($1=.7395 Euro)
