Greece Adopts Extra Budget Cuts to Save ‘Country and Economy’
March 03, 2010, 8:40 AM EST(EXT3 <GO> for more on Greece’s fiscal crisis.)
By Christos Ziotis and Natalie Weeks
March 3 (Bloomberg) -- Greek Prime Minister George Papandreou announced 4.8 billion euros ($6.6 billion) of additional deficit cuts as he tries to convince European allies and investors he can tame the region’s biggest budget gap.
Greek bonds rose to their highest in three weeks on the measures, including higher fuel, tobacco and sales taxes. The plan will also cut by 30 percent three bonus-salary payments to civil servants. Public workers already had their wages frozen and benefits cuts, and unions have called for new strikes over today’s plan.
The premier is risking a backlash at home to meet European Union demands for more deficit cuts before allies would come to Greece’s aid. The announcement comes as Papandreou prepares to meet Germany’s Angela Merkel on March 5 and French President Nicolas Sarkozy on March 7 to discuss Greece’s financing needs and ways to limit the fallout from the weakening euro.
“Today’s announcement is as much about giving other EU governments more political capital in the event that they do eventually need to provide liquidity to Greece,” said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London. “They can make the claim to their own taxpayers that Greece has taken further measures as suggested by the EU.”
Yield Falls
The yield on the benchmark 10-year bond fell 13 basis points to 6.02 percent, the lowest since Feb. 11. The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, declined 14 basis points to 2.91 percent.
The austerity measures are “difficult” though necessary for “the survival of our country and our economy,” Papandreou said after a Cabinet meeting in Athens today.
German Finance Minister Wolfgang Schaeuble said today that the Greek package should further calm markets and allow Greece to raise funds through new debt sales, signaling that an aid package may not be forthcoming. A German government spokesman said today that financial aid is not on the agenda for Merkel’s meeting with Papandreou.
Concern about Greece’s ability to finance its debt pushed the risk premium to 396 basis points on Jan. 28, the highest since the start of the euro in 1999, boosting the cost of selling new bonds and raising the risk of default. The premium on Spanish and Portuguese debt has also surged as investors shunned bonds of other high-deficit EU nations.
Looming Redemptions
Greece faces more than 20 billion euros in debt redemptions in April and May. The EU is devising a plan to grant Greece about 25 billion euros in aid should the need arise, German lawmakers have said, enough to cover the maturing debt. One option could involve using state-owned lenders such as Germany’s KfW Group to buy its bonds.
“If our country doesn’t manage to borrow with similar terms as is normal for a European Union country, then the consequences will be something more than catastrophic,” Papandreou said in a speech yesterday. “Our responsibility is to avoid this catastrophe.”
Papandreou told his Cabinet today that if the country needed aid and the EU weren’t forthcoming, he’d consider seeking help from the International Monetary Fund, according to a government official who attended the meeting.
EU officials have said that Greece’s financial woes pose a threat to the entire euro area and the strength of the region’s single currency. The euro has lost almost 5 percent against the dollar this year on concern that Greece won’t be able to tame the shortfall and could threaten monetary union.
Blaming Speculators
Greece has blamed market speculators for fueling the decline in its securities and European officials have warned hedge funds that they shouldn’t try to profit from the woes of the region’s nations. U.S. authorities have told some hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests.
Today’s measures are the second additional actions adopted by Greece since presenting its original deficit-cutting plan to the European Commission on Jan. 15 and aim to insure that Greece makes good on its pledge to trim a deficit of 12.7 percent of gross domestic product to 8.7 percent this year. The measures were included in a bill sent to parliament today that will be voted on March 5, Greek news agency ANA reported.
The package, the equivalent of 2 percentage points of GDP, includes raising the main value-added tax to 21 percent from 19 percent and increasing fuel, alcohol and tobacco taxes for a second time this year. The plan also calls for 2.4 billion euros in spending cuts, primarily through reducing the public-wage bill by trimming the bonus-salary payments and increasing the reduction in special benefits.
Bonus Pay
Greek workers get three additional wage payments for holidays -- a full month for Christmas and additional payouts of half a month at Easter and again in summer. Those payments will be cut by 30 percent each for civil servants. The government also raised to 12 percent from 10 percent the cuts to other benefit payments public workers can receive for things such as seniority or an advanced degree.
The main union for public workers said today they will hold a protest in Athens tomorrow against the measures and yesterday announced a third 24-hour strike of the year for March 16 in anticipation of the plan. Retirees marched to the Finance Ministry in Athens today to demonstrate against planned changes to reduce the cost of the pension system. The head of Greece’s Communist Party, Aleka Papariga, said the streets of Athens must fill with protesters.”
“When it comes to reducing primary expenditure, compensation of government employees represents an important area of potential savings,” Tullia Bucco, an economist at UniCredit Global Research wrote in a note to investors today.
Compensation for civil servants reached 12 percent of GDP in 2008, up from 10 percent in 2000 and 2 percentage points more than the euro-zone average, she wrote. The additional benefits that workers receive for advanced degrees and other qualifications accounted for about half the increase in the total wage bill in 2008, Bucco estimates.
--With assistance from Maria Petrakis in Athens and Michael Shanahan in London. Editors: Andrew Davis, Jeffrey Donovan
To contact the reporters on this story: Natalie Weeks in Athens at mpetrakis@bloomberg.net; Christos Ziotis in Athens nweeks2@bloomberg.net.
To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net; Hellmuth Tromm at htromm@bloomberg.net
