Greece has reached a deal with its creditors on austerity measures that will pave the way for talks to reduce Athens’ massive debt burden.

Greek bonds and stocks rallied on Tuesday morning after Euclid Tsakalotos, the country’s finance minister, said a preliminary agreement had been reached following late night talks.

“There was white smoke,” he said, comparing the accord to papal elections.

“The negotiations for a technical deal were concluded on all issues… the way has now been paved for debt relief talks.”

The deal, which is set to unlock billions of euros in rescue funds, will also pave the way for the International Monetary Fund (IMF) to join Greece’s third, €86bn (£73bn) rescue package.

Long list of demands

The agreement saw Athens bow to a series of creditor demands, including double-digit pension cuts and a reduction in tax-free allowances in order to broaden the tax base.

Athens will also tear up rules that limit trading hours on Sundays in some parts of the country.

Policies to offset the austerity measures were also agreed, including rent subsidies, higher child benefit and more means-tested support for prescriptions.

Greek Finance Minister Euclid Tsakalotos and IMF Managing Director Christine Lagarde attend a Eurogroup meeting Credit: Reuters

The country will also inject an extra €500m to support jobs and growth provided fiscal targets are met.

The European Stability Mechanism, the eurozone’s bail-out fund, signalled that it was optimistic about the IMF’s participation in the bail-out, on which countries such as Germany have insisted.

“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,” the ESM said in a statement.

He said: “It is now for all partners to reach an understanding on the question of Greece’s debt in the coming weeks. It is time to turn the page on this long and difficult austerity chapter for the Greek people.

“With this agreement, we need now to write a new story of stability, jobs and growth for Greece and for the euro area as a whole.”

The Greek parliament will vote on the proposed measures before the next Eurogroup meeting on May 22.