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Greece Must Convince EU, Market It's Thrifty

It's set to be a tumultuous week in the Greek financial crisis that will reach its crescendo Friday when Prime Minister George Papandréou travels to Berlin to meet with the German Chancellor Merkel.

Between now and then the government here in Athens has a plenty to accomplish.

The stage was set last night by the European Union Economic and Monetary Affairs Commissioner Olli Rehn, who left Athens with a stark warning for the Greeks: you must do more if you are to convince the rest of Europe that you can deliver on your deficit reduction targets.

Papendreou and his senior ministers seem to have taken the message seriously. Later on Tuesday they will meet at 3 pm London time (5 pm Athens time to) discuss further cuts to civil service pay and new tax measures. It's expected that these will include cutting one month of the 14 months of the wages paid to 600,000 civil servants, new taxes on alcohol and tobacco, and possibly a freeze on pension payments. The full cabinet will meet on Wednesday to approve the plans.

But it's not just the rest of the EU that Greece has to convince, it's also the bond market. Greece has over €20 billion ($27 billion) that it needs to refinance by May and the pressure is mounting.

The Debt Management Office in Athens is playing its cards close to its chest at the moment and wouldn't give much of a steer this morning as to when the next auction will be. But it will probably come, we understand, after the new austerity measures have been announced.

The auction is the key test for the government's plans. If the market is willing the buy Greek debt then the need for a rescue plan is probably not as pressing as some in the media make out. Clearly, there will be a high price and 7 percent is being talked about as being the minimum coupon. But if this is not enough then a plan B will be needed.

This is where the mindset of the Germans is pivotal. Merkel needs to be able to demonstrate to the German public that the Greeks, like the Irish, are taking their medicine. She doesn't want to go down the bailout route, but if she has to then she needs plenty of evidence. Papandréou must therefore deliver.