After months of talks, Greeks told their cuts still don't go far enough

Government agrees to slash budget by €3.3bn but eurozone demands more before releasing bailout

Greece yesterday unveiled a political deal over budget cuts that should unlock a €130bn (£109m) aid package and enable Athens to avoid a potentially catastrophic default next month. After a week of fraught negotiations between the three parties that make up Lucas Papademos' coalition government, the Prime Minister's office yesterday confirmed that agreement on €3.3bn of new spending cuts had been secured.

But there is still some way to go before the deal is finalised, as the chairman of the meeting of eurozone finance ministers said Greece has to identify an extra €325m in savings for 2012 in order to trigger the bailout.

Jean-Claude Juncker said the Greek parliament will also have to pass the full package of cuts and reforms on Sunday and party leaders have to make clear that they will back the measures after elections, due in April.

"Despite the important progress achieved over the last days, we did not yet have all necessary elements on the table to take decisions today," Mr Juncker, the Luxembourg prime minister, said. "All these measures are important to ensure a smooth implementation of the programme also after the upcoming general elections."

Greece's financial backers in the European Union will not deliver the aid that Athens needs to redeem €14.4bn of its bonds next month unless the government committed itself to sweeping new austerity measures. The cuts package, equal to around 1.5 per cent of Greece's GDP, will impose deep cuts in the minimum wage and will result in thousands of public-sector job losses. The announcement prompted a furious response from the Greek trade unions, who promised more protest strikes today and over the weekend.

There was also a ministerial resignation in response to the cuts agreement. The Deputy Labour Minister, Yannis Koutsoukos, a member of the socialist Pasok party, walked out of the government accusing Greece's foreign creditors of subjecting the country to "blackmail".

The financial markets reacted with relief to the announcement of the deal yesterday afternoon, sending stock markets and the value of the euro higher. But there are further political hurdles beyond the approval of eurozone finance ministers that need to be crossed before Athens secures its new funding.

The new aid agreement also needs to be given the nod by the German parliament, where some hardline Bundestag delegates have indicated that they will vote against a new bailout for Athens. The German Chancellor, Angela Merkel, will meet the leaders of her parliamentary party today in an attempt to drum up support for the deal. The Bundestag is expected to hold a vote on the subject next week.

Yesterday's agreement should clear the way for the agreement between Athens and its bondholders to be sealed. This separate deal, which will see Greece's private-sector bondholders take a 70 per cent reduction in the long-term value of their bonds, will give Athens around €100bn in debt relief, taking the country's debt-to-GDP ratio down to 120 per cent by the end of the decade.

There was also a strong hint from Mario Draghi yesterday that the European Central Bank (ECB) is preparing to play its part in reducing Greece's sovereign debt burden. The ECB accumulated an estimated €55bn worth of Greek bonds at a deep discount in 2010 and 2011 when it was attempting to stabilise the eurozone's bond markets. If held to maturity, these bonds would deliver a profit for the ECB of around €15bn.

There have been suggestions in recent weeks that the ECB could transfer these securities to the European bailout fund, which could then transfer the profit to Greece, so Athens could reduce its debt burden.

Cutting back: The effects

22 per cent cut in the Greek minimum wage.

10 per cent reduction on top of this on the basic wage of first-time employees between the ages of 18 to 25, bringing the final cut on this category to 32 per cent.

3-year extension to the cuts, meaning basic wages will remain frozen until at least 2015.

3-year maximum duration for all collective wage agreements.

2-year labour agreements in place at present will be terminated after one year.

3-month reduction in the transposition period for the carry-over of existing pay pacts, from six to three months.

10 per cent unemployment rate must be reached before wages will rise.

15,000 civil servants will lose their jobs by the end of this year. Total number of civil servants cut by 150,000 until 2015.

550 deputy mayor positions should be scrapped, and their auxiliary staff.