GREECE yesterday unveiled a political deal over budget cuts that should unlock a 130bn euro aid package and enable Athens to avoid a potentially catastrophic default next month.
After a week of fraught negotiations between the three parties that make up Lucas Papademos' coalition government, the Prime Minister's office yesterday confirmed that agreement on 3.3bn euro of new spending cuts had been secured.
Greece's financial backers in the European Union had said that they would not deliver the aid that Athens needs to redeem 14.4bn euro of its bonds next month unless the government committed itself to sweeping new austerity measures.
The cuts package, equal to around 1.5 per cent of Greece's GDP, will impose deep cuts in the minimum wage and will result in thousands of public sector job losses.
The announcement prompted a furious response from the Greek trade unions, who promised more protest strikes today and over the weekend. There was also a ministerial resignation in response to the cuts agreement.
The Deputy Labour Minister, Yannis Koutsoukos, a member of the socialist Pasok party, walked out of the government accusing Greece's foreign creditors of subjecting the country to "blackmail".
The financial markets reacted with relief to the news of the deal yesterday afternoon, sending stock markets and the value of the euro higher. But there are further political hurdles to be crossed before Athens secures its new funding.
Eurozone finance ministers need to approve the Greek budget package before they sign off on the 130bn euro bailout.
This was originally due to take place at a Euro Group meeting in Brussels last night, but ministers from Germany and the Netherlands said that they did not have sufficient detail to make their decision.
"We have come very far, but we are still not far enough," said the German Finance Minister, Wolfgang Schäuble.
The new aid agreement also needs to be given the nod by the German parliament, where some hardline Bundestag delegates have indicated that they will vote against a new bailout for Athens.
The German Chancellor, Angela Merkel, will meet the leaders of her parliamentary party today in an attempt to drum up support for the deal.
The Bundestag is expected to hold a vote on the subject next week.
Yesterday's agreement should clear the way for the agreement between Athens and its bondholders to be sealed.
This separate deal, which will see Greece's private sector bondholders take a 70 per cent reduction in the long-term value of their bonds, will give Athens around 100bn euro in debt relief, taking the country's debt to GDP ratio down to 120 per cent by the end of the decade.
There was also a strong hint from Mario Draghi yesterday that the European Central Bank (ECB) is preparing to play its part in reducing Greece's sovereign debt burden.
The ECB accumulated an estimated 55bn euro worth of Greek bonds at a deep discount in 2010 and 2011 when it was attempting to stabilise the eurozone's bond markets. If held to maturity, these bonds would deliver a profit for the ECB of around 15bn euro.
There have been suggestions in recent weeks that the ECB could transfer these securities to the European bailout fund, which could then transfer the profit to Greece, so Athens could reduce its debt burden.
At his monthly press conference in Frankfurt yesterday, Mr Draghi denied that this would represent a breach of the ECB's constitution, which proscribes direct lending to member states (or "monetary financing") by the central bank to governments.
"If the ECB gives money to governments, that's monetary financing. If the ECB distributes part of its profits to its member countries... that's not monetary financing," Mr Draghi told reporters.