Greece targeted civil servants, the rich and the church in a sweeping new austerity program it hopes Europe will reward by helping tackle a crippling debt burden.

European Commission President Jose Manuel Barroso said on Wednesday that Greece's extra 4.8 billion euros in spending cuts and tax increases, which equate to 2 percent of gross domestic product, would be backed by European solidarity.

But Germany was quick to temper Greek hopes and market expectations for more concrete support, saying it would offer no aid when Chancellor Angela Merkel and Greek Prime Minister George Papandreou meet in Berlin on Friday.

I want to say clearly that it is not about aid measures for Greece on Friday but about good relations between Germany and Greece, Merkel said, adding there was no alternative to Greece doing its own homework.

Papandreou has repeatedly said he faces a tough battle to restore Greece's finances and credibility but has made it clear Europe must help and has threatened to go to the International Monetary Fund if the EU is found wanting.

We are now justifiably expecting EU solidarity, which is the other side of this agreement, Papandreou said in a televised conversation with President Karolos Papoulias. Europe's responsibility is historic.

The measures, divided equally between spending cuts and tax hikes, include raising value added tax (VAT) by 2 percentage points to 21 percent, cutting public sector salary bonuses by 30 percent and freezing state pensions.

There will also be higher rates of tax for those earning over 100,000 euros ($136,500) a year, for owners of big properties such as the church and for those splashing out on yachts, expensive cars and jewels.

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 had estimated austerity plans announced so far would only go half-way due to a deeper than forecast recession.

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 narrowing to 279 basis points, the lowest since mid-February.


Opinion polls show that just over half of voters back the government's austerity measures so far but Papandreou still has to contend with strikes and unrest and Greece's biggest public sector union warned of a social explosion.

People will start going hungry soon, its general secretary, Ilias Iliopoulos, told Reuters.

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.

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.

Fitch welcomed the measures on Wednesday but said they were not expected to change Greece's BBB+ rating or outlook.

It helps Greece as they seem to be taking more determined measures to cut their deficit. It will presumably encourage the markets to be more willing to lend, Fitch analyst Chris Pryce told Reuters.


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, Ingrid Melander and Harry Papachristou in Athens, George Matlock in London and Boris Groendahl in Vienna; Writing by Paul Taylor and Paul Hoskins; Editing by Ruth Pitchford and Patrick Graham)

($1=.7328 Euro)