Greece Approves $8.8 Billion in Austerity

By Marcus Bensasson and Maria Petrakis - Oct 3, 2011 4:04 AM GMT+0700
Enlarge image

Greek Prime Minister George Papandreou. Photographer: Kostas Tsironis/Bloomberg

Greece’s government approved 6.6 billion euros ($8.8 billion) of austerity measures including firing state workers, to show it can trim its budget deficit enough to secure a pending aid payment and a second rescue package.

The steps will help reduce the deficit to 6.8 percent of gross domestic product, or 14.7 billion euros, from 8.5 percent of GDP this year, according to an e-mailed statement from the Athens-based Finance Ministry last night. That is more than the gap of 6.5 percent for 2012 and 7.6 percent this year agreed with the EU, International Monetary Fund and European Central Bank, the so-called troika, to secure emergency loans to prevent default.

The troika has been squeezing Prime Minister George Papandreou for more cuts as the country’s three-year recession saps the revenue needed to close the budget gap. The additional measures aim to secure disbursement of an 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21.

“Important decisions which need to be taken on a European level depend first and foremost on us,” Papandreou told his ministers last night, according to an e-mailed statement from his office. “We need to show our dedication to reaching the goals.”

Recession Deepens

The economy is forecast to shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF in June, according to the statement.

Papandreou’s Cabinet approved the austerity measures on the eve of a meeting of European finance ministers who gather in Luxembourg today to weigh the threat of a Greek default, grapple with how to shield banks from the fallout and consider a further boost to the region’s rescue that will provide Greece’s second bailout.

The meeting was due to coincide with the payout of the sixth installment of Greece’s original rescue. That 8 billion- euro disbursement has been put off until later in October as the troika gave Papandreou more time to close the deficit gap. Papandreou announced last night that a special meeting of euro- region finance ministers would take place on Oct. 13 to hear the results of the troika’s review.

Budget Passed

The austerity measures were detailed after the cabinet meeting last night, which also approved the 2012 budget and the plan to dismiss state workers. The government by December will identify 30,000 public workers who will be put on reduced pay and either retire early or eventually be fired. The plan aims to save 300 million from the government wage bill in 2012.

The budget, which was agreed to with troika inspectors, foresees a primary surplus of 3.2 billion euros next year, or 1.5 percent of GDP, according to the statement. Parliament still needs to approve the austerity measures.

Inspectors from the troika returned to Athens on Sept. 29 to resume a quarterly review of the country’s performance in meeting the conditions of the original bailout. They suspended the inspection weeks earlier after finding that the government was failing to implement measures agreed to in exchange for continued aid.

After the troika halted the review on Sept. 1, Finance Minister Evangelos Venizelos introduced a series of measures to plug the budget gap for 2011, including a new property tax approved by parliament on Sept. 27 and further cuts to pensions and wages for state workers.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Maria Petrakis at mpetrakis@bloomberg.net;

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net