Greece predicted Friday that its budget deficit will fall sharply next year and insisted that no fresh austerity measures will be needed to plug a hole in this year's finances.   

Submitting the 2012 budget, Finance Minister Evangelos Venizelos said the deficit will shrink from an expected 9.0 per cent of gross domestic product this year to 5.4 next year, largely thanks to a debt writedown that is part of Greece's second international bailout agreed on by European leaders last month. Without the bailout, Greece faces bankruptcy and a possible exit from the euro.   

'When it comes to direct taxes, the mechanisms must work. And ours suffer from great deficiencies.'—Finance Minister Evangelos Venizelos

"This budget comes during extremely hard international conditions.… the attack is now focusing on the hard core of the eurozone," the minister said.   

Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country's national debt "totally sustainable."   

The deal includes provisions for banks and other private holders of Greek bonds to write off 50 per cent of their Greek debt holdings — potentially cutting the country's debt by €100 billion ($138 billion) and reducing the debt-to-GDP ratio to 120 per cent by 2020 from an expected 161.7 per cent this year. But the details have not yet been worked out, and negotiations have only just begun.   

Greece has been relying on international bailout loans since May 2010 after its borrowing rates ballooned. The country turned to its European partners and the International Monetary Fund, winning an initial €110 billion bailout in return for an austerity package to cut deficits bloated by years of government overspending. It soon became clear that the rescue loans were not enough, and European leaders agreed on a second deal as part of a package to shore up a debt crisis that's been spreading to bigger economies, such as Italy.   

"The entire process is voluntary," Venizelos said of the bond writedown. "There won't be one model for Greek banks and foreign banks [alike], but there will be two or three variations and anybody can pick the one that suits them."

Deep recession follows cutbacks  

Gripped by a vicious financial crisis since last year, the Greek government has imposed a series of harsh austerity measures, including salary and pension cuts and increased taxes.   

But the measures have led to a deep recession, with the economy projected to contract by 5.5 per cent of GDP this year, and a further 2.8 per cent next year. Unemployment is also steadily increasing, with the jobless figure expected to reach 15.4 per cent this year and 17.1 per cent in 2012.   

"When it comes to direct taxes, the mechanisms must work. And ours suffer from great deficiencies," Venizelos said, referring to the country's notoriously inefficient tax collection system.   

"We all want to be rich and healthy, nobody wants to be poor and sick. But we must save the country, remain in the euro … and maintain our standard of living," Venizelos said.   

On a positive note, for the first time in several years Greece expects to post a primary surplus — a budget surplus when not counting interest rate payments on outstanding debt — of 1.1 per cent of GDP next year.   

"After very many years we can present a primary surplus of 1.1 per cent," Venizelos said. "We started with a primary deficit of €24 billion in 2009, and are achieving a €2.5 billion primary surplus in 2012. This is under very hard circumstances and a deeper recession than initially expected."   

Parliamentary debate on the budget is to start on Dec. 3 and be completed on Dec. 7, so it can be voted on before an EU summit set for Dec. 8-9, the minister said.

Bailout funds awaited   

Venizelos and Papademos are due to meet later Friday with a delegation from Greece's international creditors — the IMF, European Central Bank and European Commission — for talks on releasing a vital €8 billion ($11 billion) instalment of the country's current bailout. Without the funds, Greece will go bankrupt before Christmas.   

Papademos, a former central banker and vice-president of the ECB, will also meet Bank of Greece governor George Provopoulos and travels to Brussels on Monday to see top EU officials. He then heads on to Luxembourg Tuesday for talks with eurozone head Jean-Claude Juncker.   

Papademos was appointed last week to head a coalition government formed following laborious power-sharing talks between the country's main parties. The discussions followed a severe political crisis sparked by his predecessor's sudden announcement that he would put the new debt deal to a referendum.   

The government, which is only expected to last until elections in February, won a confidence vote earlier this week. Its mandate is to save Greece from bankruptcy by securing continued payment of the rescue loans, approve last month's bailout deal and implement sweeping reforms already passed.