Greece Pledges $8.8 Billion in Austerity to Secure Loan Payout

Monday, 03 Oct 2011 07:09 AM

 

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Greece’s government pledged to fire workers as part of a 6.6 billion-euro ($8.8 billion) austerity package designed to help secure a rescue-loan payout and a second European Union-led bailout.

The steps outlined by Prime Minister George Papandreou’s administration would leave a 2012 budget deficit equivalent to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. Troika inspectors agreed to the proposed 2012 budget.

The euro dropped to an eight-month low against the dollar before European finance ministers gather today to consider an enhancement to the region’s rescue fund and the risk of a Greek default. Troika members had been squeezing Papandreou for deeper spending cuts as the country’s three-year recession sapped the revenue needed to close the fiscal gap.

“Important decisions which need to be taken on a European level depend first and foremost on us,” Papandreou told his ministers last night, according to an e-mailed statement from his office in Athens. “We need to show our dedication to reaching the goals.”

Parliament Hurdle

Greece’s measures, which require parliamentary approval, aim to secure disbursement of an 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21. Under the proposals, the deficit this year would be 8.5 percent of GDP, compared with the 7.6 percent target previously agreed with the troika. Next year’s gap is seen at 14.7 billion euros, according to an e-mailed statement from the finance ministry last night.

The euro fell 0.5 percent to $1.3327 as of 12:07 p.m. in Tokyo. Stocks retreated, with the MSCI Asia Pacific Index dropping 2.9 percent.

Greece’s economy is forecast to shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF in June, according to the statement.

Papandreou’s Cabinet approved the austerity measures on the eve of a gathering of European finance ministers in Luxembourg today. The region’s policy makers have been urged by counterparts around the world to step up their response to the sovereign debt crisis, with U.S. Treasury Secretary Timothy F. Geithner saying last week that “it’s time to move.”

Noyer on EFSF

Bank of France Governor Christian Noyer today said he’s “open” to the idea of using borrowed money to enhance the capabilities of the European Financial Stability Facility.

“It would be unrealistic to expect an increase in the EFSF itself,” Noyer said in a speech in Tokyo. “But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”

The meeting was due to coincide with the payout of the sixth installment of Greece’s original rescue. That 8 billion- euro disbursement has been put off until later in October as the troika gave Papandreou more time to close the deficit gap. Papandreou announced last night that a special meeting of euro- region finance ministers would take place on Oct. 13 to hear the results of the troika’s review.

The austerity measures were detailed after the cabinet meeting last night, which also approved the 2012 budget and the plan to dismiss state workers. The government by December will identify 30,000 public workers who will be put on reduced pay and either retire early or eventually be fired. The plan aims to save 300 million from the government wage bill in 2012.

Primary Budget

The budget foresees a primary surplus of 3.2 billion euros next year, or 1.5 percent of GDP, according to the statement.

Inspectors from the troika returned to Athens on Sept. 29 to resume a quarterly review of the country’s performance in meeting the conditions of the original bailout. They suspended the inspection weeks earlier after finding that the government was failing to implement measures agreed to in exchange for continued aid.

After the troika halted the review on Sept. 1, Finance Minister Evangelos Venizelos introduced a series of measures to plug the budget gap for 2011, including a new property tax approved by parliament on Sept. 27 and further cuts to pensions and wages for state workers.


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