The Greek cabinet is expected to approve a contentious plan Sunday to lay off state workers, and sign off on a draft of next year's budget, in a race to slash spending, free up bailout loans and stave off bankruptcy.

Without the release of an 8 billion euro ($10.7 billion) tranche of an EU bailout, massively indebted Greece could run out of money to pay state wage bills within weeks.

European officials are scrambling to avert a Greek debt default, which could wreck the balance sheets of European banks, damage the prospects of the euro single currency and possibly plunge the world into a new global financial crisis.

Negotiators from the International Monetary Fund, European Union and European Central Bank, known as the troika, have been combing through Greece's budget and reform plans since Thursday.

To persuade the troika to release the loans, Greece has promised to raise taxes, cut state wages and accelerate plans to reduce the number of public sector workers by a fifth by 2015.

The inspectors are widely expected to give a green light to the release of the aid to avoid dragging the euro zone even deeper into turmoil.

But all eyes will be on their forecasts for 2012-2014. If the inspectors conclude that Greece's recession will continue to be worse than predicted, EU officials have suggested that banks that agreed to write-off 21 percent of the value of Greek debt in July may be forced to take more pain.

Sunday's budget figures will indicate whether forecasts need to be revised. The government has been falling behind an ambitious deficit target of 7.6 percent of GDP for 2011, partly because of a deeper than expected contraction of the economy.


The austerity measures are deeply unpopular, and public sector unions hope that strikes and demonstrations can wreck the Socialist government's resolve to enact them. Striking civil servants have disrupted the talks with the troika over the past days by blockading ministries.

The government has a majority of just four seats in parliament and could be forced into elections if a handful of lawmakers balk. But disgruntled legislators have toed the party line over the past weeks and analysts expect them to continue to do so and pass the new austerity package.

No part of the package is more contentious than the plan to lay off state workers -- who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing them under nearly all circumstances.

The government plans to begin layoffs by putting 30,000 workers in a labor reserve by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed.

But the government has yet to announce how the plan would work. If most workers placed in the reserve are near pension age and planning to retire soon anyway, the savings would be negligible and the inspectors are likely to be unimpressed.

Greek officials said late Saturday that they were near a solution in their talks with the inspectors on the program.

We are close to a deal on the labor reserve, one senior official told Reuters after several hours of difficult talks on the issue, adding that the government wanted to resolve the issue Sunday in time to approve it in the cabinet meeting, scheduled to start at about 1500 GMT.

The inspection visit, which is expected to go well into next week, also focuses on budget plans for 2012-2014, a commitment to raise 50 billion euros from privatisations by 2015 and requirements to open up the country's overly regulated economy.

Finance Minister Evangelos Venizelos told the pro-government newspaper To Vima that the loan tranche was assured because we are taking such difficult decisions and the Greek people are shouldering such great sacrifices.

And Austria's Finance Minister Maria Fekter said Greece would most likely receive the 8 billion euro aid tranche in October.

But there has clearly been a shift in the views of European leaders in recent weeks, with many increasingly suggesting that bailouts agreed so far may not be enough to save Greece.

The deputy leader of the Christian Social Union, one of three parties in Chancellor Angela Merkel's center-right coalition, said Sunday Greece may be better off leaving the euro zone if it cannot restore its fiscal health.

Alexander Dobrindt told Deutschlandfunk radio that a Greek exit from the euro would be a last resort measure and Greece would find it easier to recover outside the currency bloc.

I believe it is a solution, if one wants to bring Greece back into a economically stable competitive condition, that this would be done outside the euro zone, he said.

(Writing by Peter Graff and Ingrid Melander, Editing by Rosalind Russell)