Prime Minister George Papandreou holds a cabinet meeting on Wednesday to hammer out tough new austerity measures Greece's European partners say are needed to rein in a bulging deficit and earn their financial support.
In a dramatic speech to members of his ruling PASOK party on Tuesday, Papandreou said all of Europe would be threatened if Greece failed to take brave decisions to cut a debt mountain of 300 billion euros, far bigger than the country's annual economic output.
He is under pressure to identify up to 4.8 billion euros in savings beyond those agreed in recent months. New steps could include a hike in value added tax (VAT), public sector pay cuts, a pensions freeze and higher duties on fuel, tobacco, alcohol and luxury goods.
Papandreou is due to travel to Berlin on Friday to meet German Chancellor Angela Merkel, who wants to see additional fiscal steps from Greece before agreeing to any European support for the euro zone's weakest member.
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.
In anticipation of such a deal, investors have pushed the spreads between Greek bond yields and those of German benchmark issues — a gauge of investor faith in Greek finances — down towards 300 basis points, the lowest level since mid-February.
"While the scale and form of any package remains unclear, it seems likely that some formal support will be in place by April and May, when a large chunk of Greek debt matures," said Ben May, European economist at Capital Economics.
"Nonetheless, considerably more fiscal tightening will be required beyond 2010 and the crisis is far from over."
AUSTERITY PLAN
The Greek cabinet meeting is due to start at 9 a.m. (0700 GMT) and while it is unclear whether the details of the new austerity plan will be presented there, they are expected to be publicly unveiled by Thursday.
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.
"Today, the government is forced to ask for the contribution of all citizens, to ask civil servants to make ends meet with less," he said, in a stark signal the fiscal screws are set to be tightened again.
"An entire era ends for our country and a new chapter begins," he said.
Although market pressure on Greece has eased in recent days, a Reuters poll of economists showed on Tuesday that scepticism 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.
Azad Zangana, European economist at Schroders Investment Management, said markets were still treating Greek debt as a "bomb waiting to detonate".
