By Lefteris Papadimas and Harry Papachristou
ATHENS (Reuters) - Greece has sealed a deal with the European Union and IMF that opens the door to a multi-billion euro financial bailout and will require big sacrifices from the Greek people, Prime Minister George Papandreou said on Sunday.
Those sacrifices amount to budget cuts of 30 billion euros ($40 billion) over three years, on top of measures already agreed and aimed at bringing a towering budget deficit back to the EU limit by 2014.
The government told Greeks, who have already taken to the streets in protest against the austerity drive, that they had to chose between a rescue or an economic collapse.
The aid package, expected to total up to 120 billion euros ($160 billion) over three years, represents the first rescue of a member of the 16-nation euro zone and is aimed at stemming a debt crisis that has shaken markets worldwide.
"It is an unprecedented support package for an unprecedented effort by the Greek people," a somber Papandreou told a televised cabinet meeting.
"These sacrifices will give us breathing space and the time we need to make great changes," he added. "I want to tell Greeks very honestly that we have a big trial ahead of us."
RESCUE OR COLLAPSE
Finance Minister George Papaconstantinou gave details of the agreement before heading to a meeting later on Sunday with his euro zone counterparts in Brussels, where the aid is expected to win the bloc's formal backing.
The deal's size would be announced in Brussels but it would cover a large part of Greek borrowing needs for the next three years, Papaconstantinou told a news conference.
"We are all being called to make a choice," he said.
"The choice is between collapse or salvation. The choice is between fleshing out a very ambitious and difficult 3-year program of fiscal consolidation, a program of structural reforms ... or the country reaching an absolute dead-end."
Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year.
"Today we have to flesh out an economic program which sees fiscal efforts to cut the deficit by 11 (percentage) points of GDP, or 30 billion euros, starting from today and over the next three years," Papaconstantinou said.
Salaries and pensions in the public sector would be frozen during the three-year program while a fund backed by the IMF and EU would be set up to help Greek banks. Value-added tax and duties on fuel and alcohol will rise sharply.
Papaconstantinou forecast Greece's public debt would soar to nearly 150 percent of gross domestic product but then start falling from 2014. However, the plan would cover a large part of Greece's borrowing needs for the next three years, with Athens returning to commercial borrowing when "appropriate."
In a statement, European Commission President Jose Manuel Barroso recommended that Europe activate the aid, calling the package of austerity measures "solid and credible."
"This assistance will be decisive to help Greece bring its economy back on track and preserve the stability of the Euro area," Barroso said.
Greece and its international backers hope the deal can prevent the crisis from spreading to other euro zone members with fragile finances such as Portugal and Spain.
But Papandreou faces a Herculean task in convincing Greeks to accept draconian austerity measures at a time when the economy is already in a deep recession.
On Saturday, thousands marched in May Day demonstrations in Athens shouting slogans against new budget cuts they say will hurt the poor and plunge the country into a downward economic spiral. An ALCO poll released on Friday showed more than half of Greeks plan to take to the streets in protest at the new cuts.
"HIGH DRAMA"
Famed investor Warren Buffett said on Saturday he expected continued "high drama" from the Greek crisis, adding that it was impossible to predict how it would end.
Although Greece makes up only about 2.5 percent of the euro zone's economic output, its woes have shaken confidence in the currency bloc and deepened global fears about sovereign debt built up during the financial crisis.
In Germany, which as the bloc's largest economy will be expected to put up the lion's share of the European aid, there is deep resentment about rescuing Greece, which manipulated its economic figures in order to enter the euro zone in 2001 and has lived beyond its means ever since.
Chancellor Angela Merkel insisted on making the International Monetary Fund (IMF) part of any rescue and made German aid contingent on bolder austerity steps from Athens, delaying the rescue and underscoring deep divisions in the bloc.
Economists say that if the rescue agreed on Sunday fails to calm markets, European countries could end up footing a bill of half a trillion euros ($650 billion) to save several nations on top of Greece.
Both Portugal and Spain saw their debt downgraded by ratings agencies this week and could become targets for the market unless they tackle their own deficits swiftly.
"The problem has grown bigger, this fire is threatening to spread and hurt Greece further and the other euro zone countries and economies," Papandreou told the Greek cabinet. "The cost of putting it out is expected to be huge, and the burden that Greeks will shoulder is even bigger."
(Writing by Noah Barkin; Editing by David Stamp)
