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 March 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.
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 Socialist government then slashed pensions and salaries while repeatedly hiking taxes.
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 per cent in 2011, and the writedown would reduce it to about 120 per cent by 2020.
Papademos said the troika has called for a re-examination of labour 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.
Troika officials are due in Athens on Jan. 15.
"With the beginning of 2012 we enter the most critical period for the course of the Greek economy," Papademos said. "The coming few weeks will be extremely crucial."