Greek Prime Minister George Papandreou said his government is discovering “new holes” in the budget on a daily basis as it prepares to announce as much as 4.8 billion euros ($7.2 billion) in extra deficit cuts.
Bowing to pressure from the European Union and investors to do more to tame the EU’s biggest budget gap, the steps to be unveiled today will include higher tobacco, alcohol and sales taxes and steeper reductions in public workers’ bonus payments, said a person familiar with the matter, who declined to be identified because the details aren’t yet public.
Greece is signing up to even greater austerity measures two days before Papandreou meets Germany’s Angela Merkel, and the effort may help the chancellor justify aiding Greece to her taxpayers and political allies who say the country shouldn’t be bailed out after years of excess. Greek bonds advanced for a third day yesterday on the prospect that the deficit measures might ease the way for EU assistance.
“We need the support of our partners,” Mr Papandreou told his Pasok party in Athens yesterday. “To provide it they must convince their citizens, from whom they are also asking for sacrifices, that Greece is doing what must be done.”
Bonds gain
The yield on the benchmark 10-year bond fell 7 basis points yesterday to 6.18 per cent, the lowest since February 12. The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, fell 15 basis points to 3.01 per cent, the least in three weeks.
Concern about Greece’s ability to finance its debt pushed that premium to 396 basis points on January 28, the highest since the start of the euro in 1999, making it more expensive for the country to sell new 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,” mr Papandreou said. “Our responsibility is to avoid this catastrophe.”
Mr Papandreou, who was elected in October, acknowledged the measures will be “painful” and that raising taxes might hurt economic growth, though the “primary threat is not the recession, but something worse: finding ourselves unable to borrow,” he said.
In a sign he will face domestic opposition, the main union for public workers plans its third 24-hour strike of the year on March 16.
German plan
German lawmakers say euro-area officials are devising a plan to grant Greece about 25 billion euros in aid should the need arise. One option could involve using German state-owned lenders such as the KfW Group to buy its bonds. That would be enough to cover more than 20 billion euros of debt redemptions in April and May.
“The meeting with Mrs. Merkel is the one that matters,” Willem Buiter, chief economist at Citigroup in London, told Bloomberg Radio yesterday. “The Germans will have to come up with money. In order to do that they will have to be satisfied that sufficient additional fiscal pain has been inflicted on Greece.”
Greece had planned to sell 5 billion euros of bonds as soon as this week. The country is under no pressure to sell more debt and will do so when market conditions are “favorable,” Petros Christodoulou, head of the country’s debt management agency, said in an interview yesterday.
In its original deficit reduction plan presented to the European Commission on January 15, the Greek government pledged to cut a deficit of 12.7 per cent of gross domestic product to 8.7 per cent this year.
The new measures, the second set of additional actions since the original plan was presented, are the equivalent of as much as 2 per cent of GDP and aim to insure that Greece meets the 2010 deficit-reduction goal.
