Greek Finance Minister Evangelos Venizelos (L) sealed the deal with the EU and IMF [Reuters]

European Union leaders have promised more money to help Greece stave off looming bankruptcy, but on condition Athens rallies parliamentary support for new austerity measures.

Following an agreement with debt inspectors from the European Union and International Monetary Fund regarding harsh austerity measures, Greek Prime Minister George Papandreou on Thursday lodged a formal request for a new bailout worth around $40 billion.

Papandreou promised to push through radical economic reform after his new finance minister clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap.

"A comprehensive reform package... and adoption by the Greek parliament of the key laws on the fiscal strategy and privatisation must be finalised as a matter of urgency in the coming days," EU leaders said in a statement following their summit in Brussels.

Greek legislators must pass the new austerity plan before June is out, letting eurozone finance ministers "complete work on outstanding elements to allow the necessary decisions to be taken by early July."

The EU leaders also said that they would order their finance ministers to take the "necessary decisions" by early July to begin implementing the bailout.

"We've got the support of our partners and I think this is not only a green light but also a positive sign for the future of Greece," Papandreou said.

The prime minister's government survived a party-line confidence vote earlier this week that paved the way for the bailout. But parliament must still vote to approve the austerity measures next week for the aid to flow.

Call for strike

The new measures promoted Greece's largest union, the GSEE, to call a 48-hour strike next Tuesday and Wednesday.

On Thursday, more than 3,000 officers from the police, coast guard and fire service - most wearing their uniforms - protested in central Athens against the cuts in a rally to parliament.

The deal reached between Evangelos Venizelos, Papandreou's new finance minister, and the inspectors included extra tax rises and spending cuts to plug a $5.4 billion gap between the initial Greek proposition and what the EU and IMF said was needed to reach the $28 billion of saving they required.

The euro rebounded against the dollar and US stocks pared losses on news of the agreement in Athens.

But economists say even a second bailout plan for Greece may buy its government only a few months' respite, and most expect Athens will have to default or write down its debt eventually.

Greece accepted a package of $156 billion of EU and IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

More immediately, Greece needs about $17 billion in aid to avoid a default on its debt mountain in mid-July that could spread contagion across the euro currency area and send shock waves around the world economy.

"Greece is committed, strongly committed, to continue a very important programme for major changes, radical changes, to make our economy viable," Papandreou told reporters.

Voluntary bond

Euro zone governments are meanwhile talking to banks and insurance companies to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a second rescue package for Athens. Venizelos said his government was signing up private investors to do the same.

Voluntary bond rollovers were used successfully in 2009 to help East European countries during the global financial crisis. But Athens runs the risk that a similar move may be considered a default by ratings agencies, because it will likely involve banks charging interest rates that are significantly lower than what they would currently get on Greek bonds bought on the open market.

The EU leaders also approved the creation of a permanent euro zone bailout fund from June 2013 as well a strengthening of the existing temporary rescue fund.

The Greek crisis dominated debate at the summit, the fourth EU leaders have held this year as they grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts and roiled global financial markets.

Investors remain sceptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps on Thursday, according to data monitor Markit, implying a more than 80 percent probability of default over that period. 

A Greek default would force European banks and governments to take big losses, undermine the creditworthiness of other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, back into recession.

Euro zone member states, led by Germany, insist any second aid package must involve the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default.

At meetings this week, banks and insurers in Germany, France, Spain, Belgium and the Netherlands were asked by national financial authorities to roll over their holdings of Greek debt when the bonds mature.

Source: Agencies