Greece Announces New Austerity Plan; May Turn to IMF for Help
March 3, 2010The government said it wouldn't rule out asking the International Monetary Fund for help, a move that could be unpalatable for the European Union.
The government also said it wouldn't rule out asking the International Monetary Fund for help, a move that could be unpalatable for the European Union.
The decisions to make the cuts were "not taken out of choice but out of necessity," Prime Minister George Papandreou said as he briefed the country's president on the new measures, which are aimed at winning European Union support for Greece and calming financial markets.
Greek officials won verbal support from EU leaders, but also said they would not rule out IMF help. The IMF is already offering advice, but European Union officials have said an IMF bailout is not needed.
Analysts say IMF intervention is opposed for political reasons -- not least because IMF head Dominique Strauss-Kahn is a potential election opponent for French President Nicolas Sarkozy, who could be reluctant to see a potential opponent serve as the euro's savior.
The measures contain euro2.4 billion ($3.3 billion) in new revenues such as taxes and another euro2.4 billion in spending cuts. They include cuts in civil servants' salaries, pension freezes, increasing sales tax, or VAT, from 19 percent to 21 percent and hiking taxes on alcohol, cigarettes, luxury cars, yachts, precious stones and leather goods among others.
The European Union had expressed support for Greece but demanded additional cuts, and Papandreou said the government was "awaiting European solidarity" regarding the new plan. "That is the other side of this agreement. So Europe faces a historic responsibility," he said.
Two senior government officials said Papandreou refused to rule out the option of Greece going to the International Monetary Fund to seek help. The officials spoke on condition of anonymity to disclose discussions during a closed-door Cabinet meeting just before the austerity measures were announced.
The government hopes endorsement of the latest measures will open the door for a possible financial backstop from other European Union countries and convince bond investors to keep loaning the country money so it can roll over euro54 billion in expiring debt.
Some finance officials and economists have argued that the Washington, DC-based IMF is the right body to give Greece a financial backstop since it has extensive experience in bailouts and enforcing agreed cutbacks. Some have even called for the EU to create a European Monetary Fund to assist members in trouble.
Simon Johnson, an economist at the Massachusetts Institute of Technology's Sloan School of Management and a former economist at the IMF, told the Associated Press last week that Greece quietly approaching the IMF could drive the EU "nuts," allowing Greece to negotiate a better deal with its partners in the EU.
There's mounting talk that Strauss-Kahn may present himself as a Socialist candidate in the next French presidential election due in 2012 against the current man in the Elysee Palace Nicolas Sarkozy.
"Sarkozy absolutely does not want Strauss-Kahn to do anything that can be presented as a statesman-like contribution to the world," Johnson said.
Hans Redeker, a senior analyst at BNP Paribas, thinks that in the case of the IMF coming in it would provide Greece something similar to what it gave Hungary -- around 20 percent of the country's economy, in this case around $45 billion.
Redeker said the only reason why German Chancellor Angela Merkel would promote an intra-EU solution is related to French domestic politics.
"President Sarkozy wants to keep the IMF out, not providing IMF's chief Strauss-Kahn a European platform," said Redeker.
IMF help would however highlight the European Union's inability to manage the crisis on its own. Strauss-Kahn has said the international lender is ready to help if askes but understands that the EU is unwilling.
Greece has come under intense pressure from the European Union to tame its finances, which include a budget deficit that stands at a staggering 12.7 percent of gross domestic product in 2009. Athens has promised to reduce it to 8.7 percent this year, but many economists consider that goal unrealistic.
The European Commission and the top economy official in the 16 nations that use the euro backed Greece's decisions, saying they would help financial stability of Europe's currency union.
EU Commission President Jose Manuel Barroso and the head of a group of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, both said they were confident Greece could now reduce its deficit by the required four percentage points this year, and said the country's ambitious program "is now credibly on track."
Germany, which Papandreou will be visiting on Friday to meet with Chancellor Angela Merkel, welcomed the new austerity plan as an important step toward restoring market confidence but made clear it is not currently planning to pledge aid to Athens.
The new measures are "in line with the talks so far and pledges so far by Greece with its European partners," said Christoph Steegmans, a spokesman for Merkel. "The goverment trusts that Greece will do its homework, strengthen the credibility of the country and support the stability of the euro," he said, stressing that Merkel's meeting with Papandreou on Friday is not meant to involve "pledges of help."
German Finance Minister Wolfgang Schaeuble said the decisions "go in the right direction and deserve our respect. Our Greek partners thereby show their responsibility for Europe and the common currency. Now, it is decisive for Greece to speedily and fully implement all its decisions."
As soon as this will be done, the markets' trust should be clearly strengthened and Greece should be able to refinance its debt on the markets, he said.
"All this taken together is of high importance for the stability of our common currency," Schaeuble said.
Greece wants EU help to borrow money at lower rates, but European officials have remained tightlipped over any potential rescue plan, insisting Athens must first improve its finances. Greece's financial crisis has severely shaken confidence in the euro, the common currency used by 16 nations. It has also lead to market expectations of some sort of bailout led by the German and French governments.
UniCredit analyst Tullia Bucco said in a Wednesday research note that reducing the compensation of Greek government employees represents an important area of potential savings, as could a reform of the country's pension scheme.
UniCredit said Greek pension expenditures currently absorb nearly half of the resources devoted to social payments, while the effects of population aging will become critical by the end of the decade.
"Reforms to boost potential growth, while currently not on the government agenda, won't come a moment too soon to make the fiscal adjustment more tolerable," Bucco said.
Associated Press writers Aoife White in Brussels, Juergen Baetz and Matt Moore in Berlin, George Frey in Frankfurt and Derek Gatopoulos and Elena Becatoros in Athens contributed.
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