Greece's bloated public sector – the playground of patronage politics by successive governments over the last 30 years – will bear the brunt of the concessions made by prime minister George Papandreou in return for the historic bailout by the EU and International Monetary Fund.

Civil servants will lose up to two months in wages, with salaries and pensions being frozen during the three-year programme.

In what was regarded as one of the toughest speeches made by a prime minister in Greece, George Papandreou warned Greeks today of the harsh realities of the terms of the financial package.

"The alternative course would be a catastrophe and greater pain for all. Economic reality has forced us to take very harsh decisions," Papandreou told his ministers in a televised address of the emergency meeting of his cabinet – the first ever held on a Sunday morning. "This is the only way we will finance our €300bn [£261bn] debt. These sacrifices will give us breathing space and the time we need to make great changes. I want to tell Greeks, very honestly, that we have a big trial ahead of us," he said, adding that the civil service was "the big sick man" of Greece. The politician, who inherited the crisis when his Pasok party ended five years of conservative rule last October, insisted that his government would have no choice but to enforce the economic reforms ruthlessly.

It is hoped the cost-cutting policies will trim the budget of €30bn – 11 percentage points of GDP over the next three years – bringing a runaway public deficit of 13.6% within permissible EU limits by 2014. Previous austerity measures announced during the socialists' short term in office had failed to pacify markets.

"The avoidance of bankruptcy is the national red line," Papandreou said, adding that he was aware that the painful policies could entail a political cost: "I want to be clear to all. I have done, and will do, everything so the country does not go bankrupt. By the end of my [four year] term, Greece will not be bankrupt. It will be renewed."

But it was left to Giorgos Papaconstantinou, the Greek finance minister, to outline the details of the unprecedented rescue package for a eurozone member.

Painting an even starker picture of the nation's public finances, the politician predicted that with its economy also contracting, Greece's public debt would hit nearly 150% of GDP before it even began to drop in 2014. At 120%, Athens has the highest public debt to GDP ratio on the continent. "The choice is between collapse or salvation," he said.

Under the deal, agreed after 10 days of intense negotiations with the IMF and EU, VAT will also rise by two percentage points from 21%. Duties on fuel, cigarettes, alcohol and luxury goods will similarly increase by 10%.

The Greek government has vowed to rush emergency legislation through parliament by next Friday, which will enable it to enact the reforms.

But May Day demonstrations gave a taste of the nation's mood erupting into violent protests as tens of thousands rallied through the cities of Greece denouncing economic policies they say will bring them to their knees.

With the economy already in deep recession and unemployment expected to soar over 18% this year, the majority of Greeks regard the measures – the third austerity package to be announced this year – as a policy choice too far. Anger has been stoked not only by the intervention of the IMF – the hated face of fiscal rescue programmes – but the perception that it is the poor who are being targeted by the reforms and not the rich. A poll released on Friday showed that more than half would take to the streets in protest at the new cuts. Girding for the "mother of all battles" unions have also announced a series of strikes including a nationwide walk-out this Wednesday.

"These measures are tough and unfair," said Stathis Anestis, a spokesman for private sector union GSEE. "They lead workers to misery and the country deeper into recession."

With Greece effectively shut out of capital markets because of prohibitively high borrowing costs, the emergency aid is expected to cover most of its refinancing needs over the next three years. But the country still harboured the hope of returning to commercial lenders when the exorbitant interest rates charged on government bonds had fallen and "normalised", Papaconstantinou insisted.

While shoring up the eurozone's weakest link, it is hoped the bailout will bring a decisive end to a crisis that has not only shaken global markets but, in exposing the currency bloc's fault lines, threatened to envelope other financially vulnerable eurozone members. Both Portugal and Spain had their debt ratings downgraded by credit ratings agencies last week – in a move that replicated the onset of Greece's own debt crisis.