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Mar 3, 2010 | 13:55 GMT

6 mins read

Greece: Wishful Budgeting - Take Two

Greece's Cabinet has decided to implement new austerity measures in an attempt to reduce its budget deficit by an additional 4.8 billion euros, government officials close to the Cabinet say. However, the move may only be intended by Athens to give it room to breathe for the next few months.
The Greek government decided on March 3 to implement new austerity measures aimed at reducing the state budget deficit by between 4 billion ($5.4 billion) and 4.8 billion euros ($6.5 billion), according to reports citing government officials briefed on the Cabinet decision. According to a Bloomberg report, citing Deputy Citizen Protection Minister Spyros Vougias, the new measures would lower spending by an additional 2.4 billion euros ($3.25 billion) and raise revenue by another 2.4 billion euros ($3.25 billion). The move to implement new austerity measures comes two days before Greek Prime Minister George Papandreou goes to Berlin to meet with German Chancellor Angela Merkel. It also comes as Greece prepares to auction 5 billion euros ($6.8 billion) worth of 10-year government bonds. The measures are intended to reassure international investors — and Germany — that Greece is serious about dealing with its debt crisis, but may in fact be intended to allow Athens to survive the next few months. The roughly 4.8 billion euros ($6.5 billion) worth of new austerity measures — approximately 2 percent of Greek GDP — are reported to include:
  • Increase of value-added sales tax from 19 percent to 21 percent
  • Increase in fuel, cigarette and alcohol taxes
  • Freezing pensions
  • Cut in supplementary income payments to civil servants, including a 30 percent reduction in 13th and 14th "bonus" salaries received by civil servants.
Measures come on the heels of Papandreou's speech to his party in which he described the Greek debt crisis as a war situation and austerity measures as a matter of "national survival." They also come after a joint EU Commission-European Central Bank-International Monetary Fund mission to Greece at the end of February recommended that new austerity be taken. The new measures show that the European Union was not confident of Athens' January plan — which STRATFOR referred to as highly optimistic — to cut its budget deficit by 4 percent of GDP from 12.7 percent to 8.7 percent in 2010. That plan envisioned 65 percent of the reduction coming from increased revenue generation, such as from increasing tax collection from the notoriously tax-dodging Greek public. With the additional 2 percent of GDP deficit reduction announced on March 3, Athens has committed to austerity measures amounting to 6 percent of GDP to achieve a target of 4 percent reduction. The three developments to watch now are the planned 5 billion euro ($6.8 billion), 10-year bond auction, new calls for social unrest from the unions and Papandreou's visit to Germany. The new measures proposed on March 3 seemed to have partly reassured investors with the spread between yields of Greek and German bonds immediately narrowing from 3.05 percentage points to 2.91, an indication that the cost of financing Greek government debt has gone down in relation to the cost of financing German debt. This is a positive indication for Athens ahead of its planned 5 billion euro auction. ($6.8 billion) For all of 2010, Athens will have to borrow around 53 billion euros ($72 billion), with approximately 23 billion euros ($31 billion) needed to be raised by the end of May because of maturing debt tranches. In January, it sold 8 billion euros ($ 10.9 billion) worth of bonds after the first batch of austerity measures was announced. However, the biggest public sector union, ADEDY, has already called for a March 16 strike — the same day as the deadline set by eurozone finance ministers for Athens to make its first report on the efficacy of its budgetary austerity measures. ADEDY's general secretary, Ilias Iliopoulos, said following the announcement of new measures that: "We will be on the streets with all our might. I am afraid there will be a social explosion." A raft of new social unrest and union activity could undermine Athens' desire to reassure investors that it is able to pull off the planned deficit reduction. Ultimately, the new austerity measures are an attempt to get Greece through the next two months as it tries to raise the bulk of its total financing needs for 2010. They are also intended for a German audience as a proof that Greece is willing to literally go to "war" against its deficit — and its public sector unions. If Greece is seen as taking extraordinary measures, it would make it easier for the German government to sell financial aid to Greece to a skeptical German public. According to a report by Financial Times, Merkel briefed five ministers of her government on the evening of March 2 who would be involved in a potential bailout and she outlined several options that Germany may take to support Greece if it becomes needed. The question is whether, in one year, the 4 percent GDP deficit reduction is even possible, with austerity measures amounting to 6 percent of GDP. The problem with Greece is that the majority of its deficit is structural, which means that it was not merely a product of the economic crisis and stimulus measures used to fight the recession. Growth is not expected to return until 2011, which would make raising revenue even more difficult. Therefore, the new austerity measures may be intended to reassure investors that Greece is doing something, rather than work on reducing the Greek deficit. As far as the European Union is concerned, the key is that Greece does not fail right now — amidst poor fourth quarter GDP numbers, continued banking problems across of Europe and poor consumer and corporate sentiment. A Greek default now would have repercussions across Europe through contagion, particularly among the Club Med countries (Italy, Spain and Portugal) but also by hitting the already troubled German banks, which were exposed to Club Med debt. But a Greek default, when recovery sets in across the Continent, may be a result that Germany and the rest of Europe can live with. The question is whether a European recovery will be sufficiently established by the time Greece can no longer pretend its budget deficit is something it can deal with in a year.

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