Greek PM rules out financial restructuring

The PM expressed confidence that the government's tough austerity measures would win back the confidence of the markets.

"The logic of restructuring the debt would be catastrophic for the economy, for our credibility, for our future," Papandreou told reporters in Thessaloniki a day after he sketched out his economic priorities in a speech there.

If debt payments were suspended, he said Greece "would head towards a potential and probable collapse of the banking system and the loss of Greek families' property (which) would be a tragedy," he added.

Greece averted default on its debt in May when it agreed to unprecedented cuts in pensions, public sector pay and a sales tax hike in return for a 110-billion-euro (140 billion dollar) rescue package from the European Union and International Monetary Fund.

The measures triggered waves of strikes and protests, including one in May in which three people died when the Athens bank they worked in was firebombed.

Thousands protest

During the weekend, 20,000 people marched against the austerity drive in Thessaloniki, Greece's second city, hours before Papandreou defended the measures in a major speech.

Burdened with debts close to 300 billion euros, the Greek government turned to the EU and IMF after a credit rating downgrade triggered a collapse of investor confidence that drove up Greece's cost of borrowing on the bond market.

Even after the EU-IMF bailout, some economists continue to warn that Greece could in the coming years be forced to restructure its debts, which would damage not just the Greek economy, but probably the broader eurozone too.

Right thing for country: PM

But Papandreou insisted that the government had shown it was ready to do what was needed to put right the country's finances.

"Greece was the weak link on the international market but the previous months we have proved to be capable of facing up to the problems," he said.

The government's austerity programme would help turn the country around, he argued.

"I'm sure that we will recover our credibility and that the 'spread' (the gap between yield on Greek bonds and those of Germany, a reference for the whole of Europe) is going to drop."

Papandreou stressed that his Socialist government has strived to keep the country afloat economically since coming to power 11 months ago.

"We have done what we decided to do in order not to get into the logic of bankruptcy," he said.

Asked about any new austerity measures, he said "as long as the economy does well, no new measures are needed," ruling out an increase on heating fuel about which there had been press speculation.

In his speech, Papandreou expressed confidence that his government would meet its target of a 40-percent cut in the public sector deficit by the end of the year.

He also promoted bank restructuring measures, saying the country "needed a strong public foundation".

Cutting deficit

Papandreou said he was ready to forge ahead with a cut in the defence budget, one of the largest in the EU, but this depended on Turkey, he said, in a reference to Greece's sometimes tense relationship with its neighbour.

"If there is the will in Turkey (to reduce defence spending), and I hope it will be expressed, we could talk about a significant cut (in the defence budget)," he said.

On public sector reform, a real headache for the government, the prime minister ruled out any lay-offs among civil servants.

But he reiterated his commitment to fighting corruption, particularly in healthcare.

"Taking an envelope (containing money) is fraud," he said, referring to the tradition of doctors receiving kick-backs from patients.

World intervenes

IMF, EU and European Central Bank officials are due in Athens to check the government's success in meeting the conditions for the international bailout.

If they are satisfied, a third tranche of loans worth nine billion euros can be released.

Last week the EU and the IMF gave the go-ahead for the second instalment of loans, also worth nine billion euros, which the government is due to receive by the end of the month.