EU to Back Greek Deficit Plan; Wage Freeze Is Pledged

By Maria Petrakis and Meera Louis

Feb. 3 (Bloomberg) -- The European Commission today will ask finance ministers to endorse Greek measures to reduce the European Union’s biggest budget deficit as Prime Minister George Papandreou promised more action, including a freeze on state workers’ pay.

“Greece is in the center of a speculative game aimed at the euro,” Papandreou said in a televised speech in Athens late yesterday. “It is our national duty to stop the attempts to push our country to the edge of the cliff.”

Papandreou pledged to raise fuel taxes in a move that will boost income immediately, and said an overhaul of the tax system, which will increase 2011 revenue, would be targeted at the wealthier to protect poorer Greeks. He said it is time for Greece, like other EU countries, to take “brave decisions” and raise the retirement age.

Greek bonds gained after the announcement with the premium investors demand to buy 10-year bonds over comparable German debt falling 14 basis points to 340 basis points. That’s down from an 11-year high of 396 basis points on Jan. 28.

No state worker will receive a wage increase this year, Papandreou said, reversing a pledge he made before his Oct. 4 election victory to give civil servants earning less than 2,000 euros a month a pay rise. Greek unions last night called on workers to join a strike already planned for Feb. 10 to protest the government’s cuts.

Spending Cuts

The commission, the Brussels-based EU executive, has warned that Greece may need to take further steps to shore up the budget even as it prepares to support the government’s program to rein in its deficit. The three-year plan Papandreou outlined last month includes measures to cut spending and raise revenue by 10 billion euros ($14 billion) this year.

The planned correction of the deficit by 2012 “is feasible but subject to risks,” commission President Jose Barroso said yesterday. The commission will recommend in a report today that European finance ministers endorse the Greek program at a meeting in Brussels later this month.

Skepticism about Papandreou’s plan drove the premium that investors demand to hold Greek 10-year bonds last week to the highest since the year before the euro’s debut in 1999. Concern that Greece and other European nations may struggle to contain their deficits has pushed the euro down more than 7 percent since late November.

Urging Support

The EU should do more to reassure markets that Greece’s European partners will come to its aid if its finances worsen, Nobel-prize winning economist Joseph E. Stiglitz said in an interview in Athens.

“If it made that announcement, then the speculators would know there’s no more hope and they would just go away,” Stiglitz said yesterday. “It would cost nobody.”

Papandreou yesterday urged Greeks to support the new measures and said the country couldn’t afford strikes and blockades that may derail the attempt to get the economy back on track. He sought backing in a series of meetings with political party leaders yesterday.

Adedy, the federation of Greek state worker unions, had already called a strike for Feb. 10 to protest the government’s initial plans to cut bonuses and put a partial freeze on wages. Last night, the organization said Papandreou’s measures “confirmed our expectations” and urged workers to join the strike.

Spain, Portugal

Greece, which had the EU’s widest deficit at 12.7 percent of gross domestic product last year, has struggled to convince investors it can bring the shortfall within the bloc’s limit of 3 percent and prompted investor scrutiny of other EU nations with swelling budget gaps. Spanish and Portuguese debt also fell as Greece’s finance minister said those nations face similar challenges in paring their deficits.

The EU will institute “a completely new mechanism to monitor” Greece’s budget cuts, European Economic and Monetary Affairs Commissioner Joaquin Almunia said in a Feb. 1 interview in Brussels. The government will have to submit a progress report by March 16, with a second report due on May 15, followed by quarterly updates.

“The commission will be in charge of monitoring the implementation of the program through a very intense surveillance,” Barroso said yesterday. “The successful correction of its very excessive deficit is not only important for Greece, but for the euro area and the EU as a whole.”

Greek Bailout

Economist Nouriel Roubini said in an interview today that the EU or the International Monetary Fund will probably offer financial aid to Greece to help the country avoid default.

“I expect there is going to be eventually some financial support,” Roubini told Bloomberg Television in Moscow. That support will come “either directly from the European Union or the ECB or, as I suggest, Greece should be going to the IMF to get an IMF package.”

The EU today also will take a first step toward a court case to force Greece to improve its reporting of deficit figures and other economic statistics. The commission said on Jan. 12 that “severe irregularities” in the nation’s statistical data leave the accuracy of the deficit in doubt.

Soon after winning elections in October, Papandreou’s government raised the 2009 deficit estimate to more than 12 percent from a previous forecast of 3.7 percent. The commission questioned the accuracy of the statistics presented by both the new government and the previous administration and said political interference remained an issue.

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Meera Louis in Brussels at mlouis1@bloomberg.net.