Greece pledges to cut deficit

Dina Kyriakidou and George Georgiopoulos

ATHENS Reuters Published on Thursday, Jan. 14, 2010 7:09AM EST

Greece unveiled part of its three-year plan to slash its budget deficit on Thursday but financial markets remained skeptical it can tackle a fiscal crisis.

Under pressure by EU peers to reduce a huge debt that has prompted some economists to question its euro zone membership, the government said it would aim to cut its budget gap to 2.8 per cent of GDP in 2012 from 12.7 per cent.

“The efforts in the next three years will be decisive for the country's course,” Prime Minister George Papandreou told the cabinet a day before submitting the plan to the EU. “The targets are achievable, we can do it.”

The country's fiscal ills have prompted ratings downgrades and a rise in its borrowing costs. Markets continued to punish Athens on Thursday.

Yield spreads between Greek bonds and German bunds widened to 270 basis points, up about 10 basis points from the previous day, during the televised cabinet meeting. The cost of securing Greek debt also hit a new high.

“As far as I can see there's not really much news in it. It highlights the desire of the government to reduce the deficit and limit the debt but there are still a range of questions left,” said Juergen Michels, an economist at Citigroup.

“Investors will need to have more details on how the Greek government plans to achieve its targets,” he added.

Ambitious Growth Targets

Greece's problem is convincing financial markets it can and will meet the targets it lays out.

Opinion polls show the public would support tough measures provided the pain was distributed evenly but there are signs of public unrest, with unions calling for strikes starting on Feb. 10.

Officials from the EU, which has hit out at Athens for past inaccuracies in its statistics, visited last week to examine the plan. Brussels has asked Athens for more quantified measures and to focus more on structural cuts rather than one-off taxes.

Finance Minister George Papaconstantinou told the cabinet meeting the deficit will be cut by 4 percentage points this year, from 12.7 to 8.7 per cent of GDP, with the economy returning to solid economic growth soon.

“In 2011 it will be cut further by 3 percentage points to 5.6 per cent of GDP. In 2012, by 2.8 percentage points, falling to 2.8 per cent of GDP.”

He predicted Greece's economy will expand in 2011, after falling into its first recession in 16 years in 2009, and grow by 1.9 per cent in 2012 and by 2.5 per cent in 2013.

The plan projected unemployment at 9.9 per cent this year, rising further to 10.5 per cent in 2011 and 2012. It promised to start generating primary surpluses from 2011, and laid out a 13 billion fall in borrowing this year, to €53.3-billion.

“The deficit is unlikely to fall as sharply as they think. But if the government tries to meet its goals at all costs that could prompt a very deep and serious recession ... It's clearly a very nasty situation,” said Ben May of Capital Economics.

“The growth forecast looks pretty optimistic. We think there is a very strong chance the downturn will intensify this year. We think that the economy might contract by 2 per cent this year and contract again in 2011.”

Mr. Papaconstantinou also said Greece's ballooning debt will start declining in 2012 and will be at 113.4 per cent of GDP in 2013. Greece is expected to tap bond markets later this month.

He has said deficit cutting measures will include less defence and hospital spending, a reduction of overtime and supplemental or bonus pay in the state sector and a pay freeze to public servant earning over €2,000 a month.

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