The long road to Greece emerging from its worst financial crisis in modern times reached another milestone on Tuesday as the country concluded a crucial compliance review that will allow it to avert default in July.

At the cost of yet more painful austerity – in the form of extra pension cuts and tax increases – international creditors agreed to disburse €7.5bn (£6.3bn) in emergency loans to enable Athens to honour maturing debt repayments. More importantly, lenders accepted to set talks in motion on making Greece’s debt mountain more manageable – vital if the country is to gain access to the capital markets from which it has been almost completely exiled since 2009.

The breakthrough, after marathon 12-hour talks, became apparent only when the Greek finance minister, Euclid Tsakalotos, announced in the small hours that “white smoke” had been achieved. “There is white smoke … The negotiation is finished with agreement on all the issues,” he said. “We now have a decision that the Greek government will be called to enforce with laws and decisions.”

The deal ends more than six months of intense wrangling over the fiscal and structural reforms that Athens must implement in exchange for loans from its third, €86bn bailout programme.

Although the programme was outlined in 2015 when Greece came closest to crashing out of the eurozone and reverting to the drachma, the conditions attached to the lifeline remained open to negotiation. Discord most recently had focused on labour reforms and pensions – two issues that Tsakalotos, a British-trained Marxist economics professor, had felt especially strongly about.

Under the agreement, the leftist-led government undertook to further slash pensions by 18% as of 2019.

Pension payments have now been reduced 12 times since the start of the crisis, and cut by 40% in the past six years.

With poorer out-of-work families often depending on them, news of a further drop was met with fury by union leaders, who immediately announced industrial action.

The two-party coalition led by the prime minister, Alexis Tsipras, also agreed to broaden the tax-free threshold by effectively dispensing with tax breaks as of 2020. Both measures are expected to produce savings worth €3.6bn or 2% of gross domestic product.

“It will be a very hot spring,” Odysseus Trivalas, acting president of the union of public sector employees, told the Guardian. “We have yet to see the details of this agreement but what we know is that it will mean further cuts. There will be a lot of strikes and a general 24-hour lockdown when the measures are brought to parliament for vote.”

Greece’s main opposition leader, Kyriakos Mitsotakis, said with better negotiation the painful cutbacks could have been avoided and were tantamount to a “fourth memorandum” or bailout accord.

The agreement, which also included opening up the energy market to competitors and liberalising Sunday trade, is likely to be finalised at the next meeting of eurozone finance ministers on 22 May. Legislation is expected no later than 17 May, with the ruling leftist Syriza party anticipating full endorsement from MPs.

“The government believes that this road, despite the difficulties, will lead to the country’s exits from bailouts,” interior minister Panos Skourletis told state-run ERT TV. “What’s important after closing the bailout review is to have a roadmap for debt relief.”

The International Monetary Fund, which has argued vociferously that Greece’s debt load is unsustainable and has balked at even joining the latest bailout programme, hinted that it could soon sign up to it. IMF participation is viewed as vital by Berlin, the biggest provider of Greece’s rescue funds. Angela Merkel, the German chancellor, faces general elections in September and a crisis-weary electorate that does not want more Greek drama.

In a joint statement with Greece’s European lenders, the IMF said: “The Greek authorities have confirmed their intention to swiftly implement this policy package. This preliminary agreement will now be complemented by further discussions in the coming weeks on a credible strategy for ensuring Greece’s debt is sustainable.”

Debt relief would come in the form of extended maturities and less punishing interest payments than a one-off write-down. At 180% of GDP, Greece’s debt burden is not only staggering but by far the highest in the 27-member EU. The country’s economy has shrunk by about 27% since the start of the crisis – far greater than the contraction experienced by the US during the Great Depression.

Once debt relief was in place, Greece would aim to re-enter markets again, the government said. The European Central Bank has signalled it will include the country in its bond-buying programme if its debt becomes more manageable.

“The Greek government is aiming at tapping the markets as soon as possible after wrapping up the second [bailout] review and a comprehensive deal on the medium-term [measures] for the debt,” the government spokesman Dimitris Tzanakopoulos told reporters after the agreement was announced.