Greek PM urges further income cuts, warns of disorderly default in March without loan deal.

The Washington Post - Greece’s Prime Minister urged defiant union leaders Wednesday to accept further income losses, warning that vital international rescue loans could otherwise dry up and force the debt-crippled country into a disorderly default in March.

Lucas Papademos said decisions made over the next few weeks before a mid-January visit by international debt inspectors, known as the troika, will determine whether the country holds onto the euro or reverts to its pre-2002 currency, the drachma.

Greece has been subsisting on a €110 billion bailout from its European partners and the International Monetary Fund since May 2010, and in return has imposed deeply resented austerity measures. The country is negotiating to finalize the details of its second international bailout, for €130 billion ($169 billion).

“Without the agreement with the troika and the resulting funding, Greece faces an immediate danger of disorderly default in March,” Papademos told union leaders and employers’ federations, according to a transcript provided by his office.

“If we want to secure our most significant achievements — participation in the euro and avoidance of a massive, vertical income devaluation that a disorderly bankruptcy and exit from the euro would lead to ... then we must accept a short-term income reduction,” he said.

But the country’s biggest labor union, the GSEE, ruled out any further income losses saying Greeks had suffered enough from two years of harsh austerity.

Greece took the first bailout after sky-high borrowing costs caused by its runaway budget deficit and huge public debt blocked its access to money markets. The previous, Socialist government then slashed pensions and salaries and repeatedly hiked taxes — sparking a string of general strikes and often violent demonstrations.

Largely as a result of the cutbacks, the economy became bogged down in a deep recession — expected to stretch on for a fourth year in 2012 — while unemployment reached 17.5 percent in September.

The second bailout was agreed to in October after it became clear that the first batch of loans would not suffice. That deal also called for a €100 billion writedown of the country’s privately held debt, in a bid to restore debt sustainability. The country’s debt-to-GDP ratio is currently the highest in the European Union at more than 160 percent in 2011, and the writedown would reduce it to about 120 percent by 2020.

Papademos said the troika has called for a re-examination of labor costs, to boost lagging competitiveness and fight high unemployment, and warned that, unless significant action is taken, the country will not receive its next vital installment.

“If we do not make the necessary adjustments, it is to be taken for granted that we cannot expect that the other EU countries and international organizations will continue to finance a country that does not adjust to reality and does not tackle its problems,” he said.

Immediate union response was chilly.

After talks with Papademos, GSEE chief Yiannis Panagopoulos insisted that the national collective wage agreement, which includes minimum wage provisions and those of holiday pay known as the 13th and 14th salaries, was not up for negotiation. The extra two salaries per year have been slashed in the public sector as part of austerity measures.