By Christos Ziotis and Natalie Weeks
March 3 (Bloomberg) -- Greek Prime Minister George Papandreou’s government approved an additional 4.8 billion euros ($6.6 billion) of deficit cuts as he tries to convince European allies and investors that he can tame the region’s biggest budget gap.
The package, half spending cuts and half revenue measures, includes higher tobacco, alcohol and sales taxes, said Deputy Citizen Protection Minister Spyros Vougias after a Cabinet meeting in Athens to pass the plan. The government will also cut by 30 percent three bonus salary payments civil servants receive at holiday times, a move unions warned would spark new protests.
Papandreou said after the meeting that the decision was “difficult” but necessary for “the survival of our country and our economy.”
The premier risks a backlash at home by agreeing to greater austerity measures after the European Union demanded more 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 woes. Greek bonds advanced for a fourth day on the prospect the new measures might lead to EU help.
‘Political Capital’
“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.”
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.
Concern about Greece’s ability to finance its debt pushed that premium to 396 basis points on Jan. 28, the highest since the start of the euro in 1999, making it more expensive for the country to sell 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.
“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.”
EU Aid
The EU is devising a plan to grant Greece about 25 billion euros in aid should the need arise, German lawmakers have said. One option could involve using state-owned lenders such as Germany’s KfW Group to buy its bonds. Greece faces more than 20 billion euros in debt redemptions in April and May.
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 Greek won’t be able to tame the shortfall and could threaten monetary union.
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.
Original Plan
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 package is the equivalent of 2 percentage points of GDP, about half of Greece’s pledged deficit reduction for this year. The measures include raising the main value-added tax to 21 percent from 19 percent and increasing 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.
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 paymetns 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.
More Protests
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.
“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.
To contact the reporters on this story: Natalie Weeks in Athens at mpetrakis@bloomberg.net; Christos Ziotis in Athens nweeks2@bloomberg.net.
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