Greek PM says sacrifices vital to avert bankruptcy

In a dramatic speech to his Socialist PASOK party on the eve of a cabinet meeting expected to approve new austerity measures, Papandreou said: I will fight to save the fatherland from whatever the nightmare possibility of bankruptcy might entail.

Under pressure to meet European Union demands to find up to 4.8 billion euros ($6.5 billion) in additional savings before he visits Germany on Friday, he played up the risk of default, saying speculators had made borrowing costs prohibitive.

If anyone thinks that this is a remote nightmare scenario, they don't realize what the situation is, he said. Each day we discover new holes, new landmines, in the budget deficit.

Papandreou did not spell out specific measures but he said public employees would have to get by on less, and the state could not go on subsidizing pensions. That could hurt two of PASOK's key support bases.

We need to take tough decisions, decisions that can be unfair, he declared.

Government sources said measures under consideration included raising value added tax (VAT), cutting public sector pay, freezing pensions and introducing higher duties on fuel, tobacco, alcohol and luxury goods.

Greece's borrowing costs fell to their lowest level in weeks on Tuesday amid growing expectations that the government will announce new austerity measures that will in turn help it secure European financial support.

There is considerably more confidence now that there will be some form of support mechanism to help Greece, said Kornelius Purps, a strategist at UniCredit in Munich.

GERMAN CAUTION

However, German Foreign Minister Guido Westerwelle said it was inappropriate to talk about financial aid until Athens had done more to clean up its public finances.

Before there are discussions about aid, we expect Greece to complete its homework on consolidation policy, Westerwelle, who is also vice-chancellor, told reporters.

His liberal Free Democratic Party has been a leading voice opposing a bailout of the highly indebted euro zone country, but his comments did not preclude eventual financial support.

European government sources have said Germany and France are working on contingency plans involving state-owned financial institutions guaranteeing the purchase of Greek bonds by banks or buying them directly.

Credit rating agency Moody's said in a research note the reported plan could involve the purchase of about 30 billion euros ($40.67 billion) in Greek debt by French and German state-owned banks, and by private investors.

Details might be announced on Friday when Papandreou meets German Chancellor Angela Merkel in Berlin, it added.

That might give Greece a window to issue a syndicated 10-year bond which the market expects by mid-March, when EU finance ministers will review its progress in cutting the budget deficit. It has vowed to cut it by four percentage points to 8.7 percent of gross domestic product this year.

Without waiting for the announcement of more austerity, Greece's main public sector union called a 24-hour strike for March 16 in protest against the new measures, expected to deepen cuts in civil servants' pay and benefits.

Polls show relatively strong support for plans to tackle a crippling debt mountain Papandreou said on Tuesday had reached 300 billion euros ($405.7 billion), roughly 125 percent of Greek GDP. But taxi drivers brought traffic to a halt as they drove through Athens en masse in protest against a tax clampdown.

LOCUST SWARM

In Brussels, European Socialists proposed setting up an emergency fund to prevent defaults by euro zone countries such as Greece and ward off a locust swarm of speculators.

The fund would be part of the European Investment Bank (EIB), the European Union's government-owned soft lending arm, which issues bonds to secure cash for projects such as energy and motorway construction.

However, the EIB said its charter barred it from any role in financial rescues and countries such as Germany, the Netherlands and Finland strongly oppose a bailout fund.

After EU Economic and Monetary Affairs Commissioner Olli Rehn held talks in Athens on Monday, the European Commission declined to say how much more Greece needed to save to achieve its ambitious deficit-cutting target.

Greek sources said EU, European Central Bank and IMF experts had assessed the additional gap at up to 4.8 billion euros in the most pessimistic growth scenario, but Greece has argued that the real shortfall is likely to be far smaller.

The government says a two percentage point increase in VAT to 21 percent would bring in about 2 billion euros in extra revenue, but economic analysts say it would yield only about 1.4 billion because the rise would likely depress consumption.

Cancelling a 14th month salary payment to public employees would save about 1.4 billion euros. But it would be unpopular and could undermine support for the broader austerity plan.

(Additional reporting by Marcin Grajewski and Jan Strupczewski in Brussels, Harry Papachristou and George Georgiopoulos in Athens, Ian Chua in London; writing by Paul Taylor, editing by Noah Barkin)