Pat Dollard

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ATHENS, Greece (AP) – With creditors demanding solutions to the Greek debt crisis and the financial world increasingly on edge, Athens on Wednesday froze pensions, cut civil service salaries and slapped new taxes on everything from cigarettes and alcohol to fuel and precious gems.

Markets and the European Union reacted well to the euro4.8 billion austerity plan. But combustible Greek unions were outraged—and the country’s embattled premier, who had likened the situation to a “state of war,” is headed to Germany and France seeking more definite expressions of support.

Prime Minister George Papandreou warned that unless the new measures won European Union and market backing, bringing down the cost of borrowing for the country, Greece would turn to the International Monetary Fund.

Such a move would be highly unpalatable for the European Union, highlighting the bloc’s inability to manage the crisis on its own.

“From today the problem can’t be considered ‘Greek’. We are doing what we must and more,” Papandreou said during a closed-door Cabinet meeting, in a speech which was released later. “So now, it is the time of Europe.”

If the EU and the markets don’t respond “as we would wish, because of speculative behaviour, our last resort would be the International Monetary Fund,” he said.

Greece is already receiving technical help from the IMF, but has not yet appealed to them for a bailout. The IMF has bailed out EU members Hungary, Romania, and Latvia, as well as non-members Iceland, Ukraine, Belarus and Serbia—but never a member of the euro.

The IMF in Washington said it approved of the new plan.

“We welcome the substantial fiscal measures announced by Greek authorities today,” said Caroline Atkinson, the IMF’s director of external relations.

Papandreou said the decisions for the measures, which amount to savings of euro4.8 billion ($6.5 billion), or roughly 2 percent of gross domestic product, were “not taken out of choice but out of necessity.”

Savings will be split evenly between increasing revenue and slashing spending. Tax increases include a 20 percent hike for alcohol, a 65 percent increase on cigarettes and raising sales tax, or VAT, from 19 percent to 21 percent, while cuts include curbing civil servants’ pay, cutting bonuses and stipends and freezing pensions.

“Today’s decisions reply to our country’s urgent needs to stand on its feet, to be able to borrow to cover its current public obligations, to cover the cost of servicing the public debt. So our economy doesn’t collapse,” said government spokesman Giorgos Petalotis.

Greece shocked its EU partners in October when Papandreou’s newly elected Socialists sharply revised the budget deficit to a staggering 12.7 percent of gross domestic product in 2009, from earlier estimates of below 4 percent of GDP. The crisis has hammered the euro, the common currency used by 16 nations, and made Greece’s cost of borrowing on the international markets skyrocket. It has also sparked market expectations of some sort of bailout led by Germany and France.

Athens has repeatedly said it wants EU help to borrow money at lower rates, but European officials have remained tightlipped over any potential rescue plan, insisting Athens must first improve its finances.

Papandreou heads to Berlin Friday to meet with German Chancellor Angela Merkel—whose country is highly reluctant to indicate any form of concrete assistance—and then to Paris for talks with French President Nicolas Sarkozy before flying to Washington DC to meet President Barak Obama.

Greece had taken an “important step” toward realizing its goal of cutting its budget deficit, Merkel said in Berlin.

“This is a very important signal to strengthen markets’ confidence again in Greece and so also in the euro,” she said.

Earlier, Merkel’s spokesman, Christoph Steegmans, stressed Friday’s meeting between the chancellor and Papandreou is not meant to involve “pledges of help.”

Although the government had announced an austerity plan in January, it won only lukewarm support from its EU partners and didn’t calm jittery markets. But the latest batch of budget cuts did win early approval from the EU and leading credit ratings agencies Moody’s Investor Services and Fitch Ratings, both of which had downgraded Greece’s credit rating in December.

EU Economy Commissioner Olli Rehn, who had demanded new measures during a visit to Athens Monday, described the new plan as a “potential turning point for Greece.”

“I can see that there is a very strong determination and unity to reform the country and put the public finances under control. This can be made a real turning point in the fiscal history and economic development of Greece,” he said.

EU Commission President Jose Manuel Barroso and the head of a group of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, expressed confidence that Greece could now reduce its deficit by four percentage points this year.

Juncker repeated that eurozone governments “stand ready to take determined and coordinated action, if needed, to safeguard the financial stability in the euro area as a whole.” But governments have not said how they would bail out Greece if they have to.

Moody’s said the austerity measures were a “clear manifestation” of the government’s resolve, and that it should be allowed time to follow through and implement the measures.

“The onus is on the government to demonstrate that it does not merely announce ambitious plans, but is also able to deliver on these commitments,” said Sarah Carlson, senior analyst in Moody’s Sovereign Risk Group. “However, Moody’s does not expect Greek public finances to be turned around in a fortnight.”

Fitch Ratings said that “politically challenging measures like a rise in VAT and further cuts in public sector pay indicate that the Greek authorities are indeed serious about cutting the deficit.”

Yet while the markets were happy, Greece’s labor unions certainly were not.

“These measures are terrible. I think the government does not realize how little people in this country are being paid,” said Despina Spanou of the civil servants union ADEDY. “Wage earners cannot take any more cuts. … The will throw the country into a deeper recession. We have no other choice other than to step up (our protests). We must protect our salaries and our lives.”

The union has already called its third 24-hour nationwide strike for March 16.

Smaller business owners also warned that the cutbacks would eat into their earnings, forcing closures and cutting jobs. Greek unemployment hit a five-year high of 10.6 percent in November.

“Obviously, we must expect a fall in consumer demand,” the Athens chamber of small and medium-sized industries said.

“This carries the threat of a further decrease in company turnover, directly endangering the functioning of smaller businesses, increasing unemployment and in consequence reducing state tax revenues instead of boosting them.”