09/10/2011 10:51 EDT | Updated 11/10/2011 05:12 EST

Amid protests, Greek prime minister pledges to meet fiscal targets despite recession

THESSALONIKI, Greece - Greece's government will meet ambitious savings targets this year despite a deepening recession, the prime minister said Saturday, to secure the continued flow of international rescue loans that are protecting debt-crippled Greece from a catastrophic bankruptcy.

As George Papandreou delivered his annual, keynote speech on the economy in Greece's second-largest city of Thessaloniki, police on the streets outside clashed with violent demonstrators as more than 25,000 people — from taxi-drivers to sports fans — joined a wave of anti-austerity protests.

Two people were arrested and nearly 100 people detained, police said, while at least two demonstrators were injured during the clashes in the northern port city.

"We will push through all the major changes our country has needed for years," Papandreou said in a nationally televised address. "And we will take whatever other decisions are needed, we will do whatever is necessary to keep the country on its feet."

Papandreou added that his main concern was to keep the country solvent.

"We don't have the right to abandon this effort halfway through," he said. "Because if it remains half-done, (our) sacrifices will have been in vain."

Papandreou's Socialist government has imposed painful austerity measures over the past 20 months — cutting pensions and salaries while raising taxes and retirement ages — to secure vital international rescue loans worth €219 billion ($302.6 billion). But its efforts to economize while reviving a fast-contracting economy amid record unemployment have faltered, sparking new market distress.

Finance Minister Evangelos Venizelos, who was forced to deny rumours of impending bankruptcy over the weekend, said earlier that the economy is expected to contract more than 5 per cent this year — considerably exceeding forecasts. But Papandreou insisted that this would not derail the savings drive, which is meant to cut budget overspending from 10.5 to 7.5 per cent of gross domestic product this year.

"Even if the recession is significantly deeper than forecast ... Greece will achieve its fiscal targets, doing everything it must to that purpose," he said. "At the point the eurozone and the international financial system have reached right now, any delay, any ambiguity, any option other than to faithfully honour our commitments is dangerous for our country and its citizens."

Several thousand taxi drivers protesting new licensing reforms launched a chain of separate marches, chanting anti-government slogans. Members of the country's two biggest labour unions, university students, anarchists — and even fans of a soccer club — joined in.

The default rumours, combined with the sudden resignation of senior European Central Bank official Juergen Stark, created new market fears that sent yields on Greek 10-year bonds surging to 21 per cent. Greece has the worst credit rating in the world, just shy of default.

But Venizelos insisted Saturday the country could still pull through.

"Whoever believes that Greece has been broken or has no hope is clearly out of touch with reality," he said. "The two coming months are crucial for the very existence of our country. These are two months whose every day counts as a year in terms of effort."

By the end of October, Greece has to conclude talks on a complex bond swap deal under which private holders of its debt — mostly banks and pension funds — will take a loss on their holdings in return for new, more secure bonds.

It must also persuade the European Union and the International Monetary Fund, which are providing the bailout loans, that it is making sufficient progress with fiscal discipline, reforms and privatizations. If Athens fails in that, the country will not receive the next €8 billion ($11 billion) batch of its loans, and will go bankrupt within weeks.

"The clearest message Greece is sending at this point ... is that we are absolutely determined, without taking any momentary political cost into account, to fully meet our obligations to our partners," Venizelos insisted.

Elected two years ago with a 10 per cent margin, Papandreou's Socialists have seen their ratings fade as the cutbacks soared. A poll in the Sunday edition of Kathimerini newspaper shows the opposition conservatives 4 percentage points ahead, 32 per cent to 28 per cent, but also forecast a hung parliament if elections were held now. The Public Issue poll had a margin of error of plus or minus 2.9 per cent.

Under the previous conservative government, Greece falsified some of its financial data to hide the true extent of the country's debt problems.