Greece: One step forward, two steps back

NEW YORK (CNNMoney) -- The Greek government faces a crucial test this weekend as the nation's parliament is set to vote Sunday on austerity reforms needed to qualify for a second bailout.

Greek Prime Minister Lucas Papademos outlined the reforms Friday in remarks to members of his cabinet, saying the nation is facing a time of "historic responsibility."

The government needs to do "whatever it takes" to approve the program and secure the emergency loans it needs to avoid going bankrupt, said Papademos.

"Any other development would be disastrous," he said. "It goes without saying that anyone who disagrees and does not pass the new program cannot remain in the government."

A handful of Greek politicians seemed to take Papademos at his word. Four members of the far-right LAOS party, the smallest member of the governing coalition, handed in their resignations Friday.

Meanwhile, union-backed protests in Athens turned violent as hooded youths began throwing stones and launching Molotov cocktails at the police, who responded with stun grenades and teargas.

The austerity program is a prerequisite for Greece to qualify for a second bailout of €130 billion from its troika of lenders at the European Union, International Monetary Fund and European Central Bank.

Greece needs the money to avoid a potential default on a €14.5 billion bond redemption in March.

After a week of political wrangling, Papademos and the members of his governing coalition agreed Thursday on the politically unpopular reform package. But euro area finance ministers were not satisfied and set out additional conditions before they will sign off on more bailout money.

Europe's debt crisis: Where things stand

First, the Greek Parliament must approve the reform program Sunday. Then, the Greek government must identify an additional €325 million worth of "structural expenditure reductions" to ensure that its fiscal targets are achieved. And finally, the nation's political leaders need to provide "strong assurances" that the reforms will be implemented even after elections are held later this year.

"In short, no disbursement without implementation," said Jean-Claude Juncker, who heads the Eurogroup of 17 eurozone finance ministers.

The thinly-veiled ultimatum must be met by next Wednesday, when the Eurogroup will hold another meeting to review Greece's progress, said Juncker.

Assuming the conditions are met, Juncker said the ministers should be able to make the necessary "political decisions" to release loan guarantees from the eurozone bailout fund, the European Financial Stability Facility.

The latest delay highlights the growing frustration among top EU officials with the lack of progress Greece has made toward paying off its debts and restructuring its economy.

The nation at the center of Europe's debt crisis, Greece has struggled to follow through on the conditions of its 2010 bailout as the Greek economy has sunk deeper into recession.

"We cannot live with a system where promises are made and repeated and repeated and where the implementation measures are, from time-to-time, too weak," said Juncker. "So we are insisting on a real, true implementation."

Papademos told cabinet members Friday that the reform program is designed to restore the nation's economic competitiveness and boost job growth.

It also aims to stabilize Greek government finances by cutting spending by 1.5% of economic output this year. That will include a new tax system and "adjusted" pensions for retired government workers, among other "structural reforms."

In addition, the program calls for at least €19 billion in additional revenues from the privatization of state assets. It also contains measures to recapitalize Greek banks and boost lending.

The program seeks to produce a primary budget surplus of 4.5% this year, and shrink the nation's deficit by 7% over the next few years. It also aims stabilize the economy next year and help revive growth by 2014.

But even if the package is approved Sunday by the Greek Parliament, that may not be the end of Greece's bailout saga. The German Parliament must also approve the disbursement of additional EFSF funds.

What's next for Europe?

In addition, Greece needs to seal a deal with private sector creditors to write down €100 billion worth of Greek government bonds and execute a debt exchange that would leave investors with a loss of up to 70%.

Olli Rehn, the top economic and monetary official at the European Commission, said the private sector deal is "practically finalized" and is expected to be made official next week along with the overall reform package.

A spokesman for the Institute of International Finance, which represents the commercial banks and investors that hold Greek bonds, welcomed the progress and said the organization looks forward to finalizing the agreement.

The writedown will help reduce Greece's debt burden to 120% of gross domestic product by 2020, from about 160% currently, said Rehn. But he acknowledged that timing is key, since any delay could put Greece at risk of a default in March.

"Yes, we have a shortage of time, but we are still within the schedule," said Rehn.

He also suggested that the EU will begin playing a bigger role in overseeing the Greek government's implementation of the proposed reforms.

The Greek government needs to take "genuine ownership" of the second bailout program, Rehn said. To that end, the EU will "further strengthen our capacity on the ground in Athens both in terms of monitoring and surveillance."

The EU will provide "technical assistance" on matters including fighting tax evasion and the privatization of state assets, he said. In addition, EU officials are considering a plan to put Greece's bailout funds in an escrow account as part of a plan to ensure compliance, he added.

-- CNN's Elinda Labropoulou contributed reporting from Athens