Brussels vows to hold Greece to austerity

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The European Commission vowed on Wednesday (3 February) to hold Greece strictly to an austerity plan to tackle the most severe debt crisis in the euro zone, proposing unprecedented surveillance measures to keep Athens' soaring budget deficit under control.

The European Commission put Athens on an unprecedentedly short leash, demanding a mid-March interim report on progress in reducing its huge deficit, and quarterly updates thereafter, partly as a result of accumulated mistrust of Greek statistics.

The EU executive conditionally approved Greece's three-year fiscal plan but said further cuts in public sector wages would be required if, as many economists believe, measures announced so far are insufficient to meet steep deficit-reduction targets.

"The Commission will monitor the execution of the budget and of the reforms very closely and regularly and welcomes the Greek government's readiness to adopt further measures as and when necessary," said EU Economic and Monetary Affairs Commissioner Joaquin Almunia.

In addition to the strict surveillance, the Commission recommended launching an excessive deficit procedure against Greece, suggesting a strict adjustment path to cut its deficit.

"The recommendations include measures to be implemented already in 2010, such as a reduction in the overall public sector wage bill, including through the replacement of only 1 of 5 retiring civil servants, progress with healthcare and pension reforms, the set up of a contingency reserve amounting to the 10% current expenditure, tax and excise duties increases and tax administration reform," the Commission said.

An infringement procedure was also launched against Athens for "failing in its duty to report reliable budgetary statistics".

The Commission recommendations will now be forwarded to EU finance ministers for possible approval on 15-16 February. If endorsed, it will be the first time that a eurozone member country will be put under such strict surveillance.

The EU said the Greek plan to cut the budget gap from 12.7% of gross domestic product in 2009 to below 3% in 2012 would not be easy to implement and the Socialist government must be ready to make further deep fiscal adjustments.

"If the programme is followed by decisions, by actions […] this will have a positive effect on the market," said Almunia. "If decisions are not there, markets will put additional pressure."

Markets jitter

Greek bonds and stocks rose briefly in response to Brussels' approval, but dipped again and ended in negative territory after fellow eurozone weakling Portugal cut a planned treasury bill issue because of high borrowing costs.

A vote in the Portuguese parliament on Thursday on a law on regional financial transfers which the government says could undermine efforts to cut the budget gap added to unease.

Spain also fuelled jitters by disclosing that its budget deficits for the next three years would be higher than forecast.

The premium investors demand to hold Greek government bonds rather than benchmark German Bunds widened again after briefly falling on the EU endorsement. The cost of insuring Greek debt against default also rose, signalling that Greece was not out of the woods and implementation was key.

"The market appears to be taking over from the European Commission the role of enforcer of fiscal discipline, and it could prove far more efficient and brutal than the Stability and Growth Pact," said Unicredit chief economist Marco Annunziata.

Greece's main private sector union GSEE called a one-day strike for 24 February, following public sector union ADEDY, which has set a walkout for 10 February, both in protest at EU-prescribed austerity measures.

In the streets of Athens, people said they would accept even tougher measures if they believed they would avert economic collapse but had little faith those taken so far would help.

"I don't believe the government can get us out of the crisis," said Nikos Haldoutas, 32, working in the film industry. "I don't think anything will change in the next 50 years."

Single currency 'not at risk', says Almunia

Almunia dismissed concerns that Greece's fiscal problems could put the single European currency at risk or require a bailout by European partners to avoid a possible default.

"I am fully convinced that the European Union and euro area have instruments enough to deal with this issue and solve this problem [Greece]," Almunia said.

Finance Minister George Papaconstantinou asked Greece's eurozone partners to back its belt-tightening package. "They have to support Greece in its efforts and convince markets that there is no weak link and that we all are in the same boat," he said in a television interview.

Some economists want Greece to seek an International Monetary Fund loan and supervision of its adjustment programme.

But eurozone countries have been adamant that the EU can handle the matter without IMF intervention, which would be politically embarrassing and imply a failure of the EU's Stability and Growth Pact budget rules.

Spain said on Wednesday it now expects its budget deficit to total 9.8% of GDP in 2010, 7.5% in 2011 and 5.3% in 2012 – estimates that are 1.7 to 2.3 percentage points above previous forecasts.

Portugal's debt agency IGCP cut its planned T-bill placement to 300 million euros from 500 million on Wednesday as yields spiked by 49% over January's placement, traders said.

Greek measures

On the eve of the Brussels verdict, Prime Minister George Papandreou went on television to announce fresh savings measures including a fuel tax rise and a wider freeze on public pay, warning Greeks they face the worst crisis in decades.

Deputy Finance Minister Philippos Sachinidis told Reuters the fuel surcharge should raise an extra one billion euros this year and the public wage freeze about 150-200 million euros.

Markets are concerned that the government may find it difficult to sell harsher austerity measures at home and may face a violent backlash in a country with a history of political riots, even though public opinion is broadly supportive for now.

Greece has to refinance 54 billion euros in debt this year, with a crunch in the second quarter as 20 billion euros becomes due. A five-year bond issue last week was five times oversubscribed but the government had to pay a hefty premium.

(EURACTIV with Reuters.)

Greece's public debt is expected to hit 120% of GDP this year, twice the level authorised under the euro zone's Stability and Growth Pact, which limits debt to 60% of GDP.

Fears of a possible default have reverberated across the euro zone, hitting the common currency and bond prices and prompting speculation of a bailout plan which EU officials deny.

The austerity programme includes welfare spending cuts, tax hikes, non-replacement of departing civil servants and cuts in top-up wages for higher earners in the public sector.

  • 15-16 Feb.: EU finance ministers to examine and possibly endorse Commission recommendations for Greece.
  • 16 March: Greece to submit first report on measures to tackle debt.
  • 16 May: Greece to submit second report on measures to tackle debt.
  • Thereafter: Evaluations of Greek plan to take place on a quarterly basis.

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