Greece pledges to shrink state, hopes for aid deal

Greece promised to shrink its bloated public sector on Tuesday ahead of a second conference call with the EU and the IMF, in a bid to convince them to pay out funds despite repeatedly missing the targets of its bailout deal.

Government officials said a first call on Monday had been "productive and substantive" and they expected to clinch the release of an 8 billion euro (USD 11 billion) aid tranche that it needs to avoid running out of cash next month.

But international lenders are running out of patience with Athens, increasing pressure on the country to deliver on pledges to slash its deficit even as the economy heads towards a fourth year of recession.

"Our primary target is to shrink the state," deputy government spokesman Angelos Tolkas said on NET radio. "The Greek state budget has stopped paying the wages of some 200,000 civil servants in the last two years. And we are continuing."

Finance Minister Evangelos Venizelos will discuss austerity plans with EU and IMF inspectors at 1700 GMT, his office said.

He has pledged to take on as much austerity as needed to avoid a default that would likely trigger deeper turmoil on already shaky global markets and push other indebted countries in the euro zone periphery closer to the brink.

Officials close to the so-called troika of the EU, IMF and European Central Bank said Greece still had work to do before the call, including fleshing out details of how to prevent slippage from next year's budget deficit target of 6.5% of annual output.

Italian downgrade

European stocks rose on Tuesday as investors looked for bargains after fears that Athens was close to default hit global markets on Monday. The rise happened despite Standard & Poor's surprise downgrade of Italy, highlighting that country's own burgeoning debt crisis.

In Athens, the debt agency was preparing to auction 1.25 billion euros (USD 1.7 billion) of 3-month T-bills, papers that are Greece's sole remaining source of market funding and often seen as a barometer of foreign sentiment towards Athens.

On Monday, the IMF's representative in Greece spelled out steps Athens must take to secure its next aid tranche, including improving tax collection and cutting public sector spending.

"The ball is in the Greek court. Implementation is of the essence," Bob Traa told an economic conference.

Athens also denied a report that it was considering holding a referendum on the country's membership in the euro zone.

Citing unnamed sources, Kathimerini daily wrote that Prime Minister George Papandreou was mulling a plebiscite on whether Greece should continue to tackle its debt crisis within the single currency or outside of it.

The government has long said it was planning a referendum this autumn on political reforms but has repeatedly denied it would concern the country's euro membership.

Asked if the referendum would be about staying in the euro zone, deputy government spokesman Tolkas said: "No. We haven't discussed such an issue, definitely not."

He said the government had put a bill to parliament on Monday aimed at allowing the country to hold referenda but without specifying any issue.