Greece Faces Uphill Task;

Arthi Gupta
03 May, 2010
New York City

Greek government agreed to deeper cuts in spending and raise taxes in exchange for a bailout package for the next three years of as much as

[R]3:00 PM Frankfurt – Greek government agreed to deeper cuts in spending and raise taxes in exchange for a bailout package for the next three years of as much as €120 billion. The euro declined on the worries that Greece may not be able to implement deep cuts and financial crisis may spread in the region.[/R]

Prime Minister George Papandreou said Greece had reached an agreement with the International Monetary Fund and the European Union that is expected to be worth as much as €120 billion.

The deal aims to help the country avoid debt default and prevent economic contagion from spreading throughout the region.

The bailout amounts to €45 billion this year, followed by more aid in the following two years. In return, Greece pledged to squeeze cost savings and tax increases amounting to an estimated €24 billion, or 10% of the country’s gross domestic product.

Finance Minister George Papaconstantinou said that Greece would make budget cuts of €30 billion, or $40 billion to reduce the budget deficit to less than 3% by 2014. Papaconstantinou said Greece''s public debt would soar to nearly 150% of GDP but start declining from 2014.

The austerity measures include scrapping bonus payments for public sector workers, capping annual holiday bonuses and axing them for higher earners, banning increases in public sector salaries and pensions for at least three years, increasing value-added-tax from 21% to 23%, raising taxes on fuel, alcohol and tobacco by 10% and taxing illegal construction.

In addition, the ECB agreed to suspend the minimum credit rating for Greek collateral. This means that even if rating agencies cut Greece’s creditworthiness below investment grade, the ECB will still accept Greece’s sovereign bonds as collateral.

But Papandreou faces a difficult task in convincing Greeks to accept steep austerity measures at a time when the economy is already in a recession.

Greeks have already taken to the streets to demonstrate against the austerity drive and previous governments have backed off reforms to defuse often violent protests. But politicians in Germany made clear that Athens should not take approval for granted.

On Saturday, thousands marched in May Day protests in Athens shouting slogans against new budget cuts they say will hurt the poor and plunge the country into a downward economic spiral. An ALCO poll on Friday showed more than half of Greeks plan to take to the streets in protest at the new cuts.

The package is the first rescue of a member of the 16-nation euro zone. Although Greece makes up only about 2.5% of the euro zone''s economic output, economists say that if the rescue fails to calm markets, European countries could end up footing a bill of half a trillion euros or $650 billion to save several other nations.

The euro fell 0.5% against the dollar to $1.3226 from $1.3294 in trading in Frankfurt and New York.