The Greek government said it passed a new budget backed by its international creditors, including larger deficits than previously forecast, as the country moves closer to securing an 8 billion euro ($10.7 billion) aid payout needed to avoid default.
Prime Minister George Papandreou's Cabinet also passed 6.6 billion euros of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. Finance Minister Evangelos Venizelos had previously said Greece would miss the targets and the troika accepted the new budget.
The new deficit numbers “should not derail Greece's current negotiations with the troika,” Geoffrey Yu, a currency strategist at UBS AG in London, wrote in a note to clients. “Greece pledged to undertake additional spending cuts in order to secure the next aid tranche. We remain of the view that Greece will ultimately receive its current bailout tranche.
Greek bonds fell before European finance ministers gather today to consider enhancements to the region's rescue fund. Papandreou adopted the austerity measures under pressure from the troika as the country's three-year recession sapped the revenue needed to close the fiscal gap. Euro region finance chiefs will meet again on Oct. 13 to decide whether the austerity push is enough to win the sixth bailout payment.
'Dedication' to Goals
“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 in Athens. “We need to show our dedication to reaching the goals.”
The yield on Greece's 10-year bond rose 17 basis points to 22.86 percent and the two-year yield gained 71 basis points to 62.88 percent. The euro fell 0.4 percent to $1.3333 as of 8 a.m. in London.
Greece's measures, which still require parliamentary approval, aim to secure disbursement of the 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21. Under the proposals, the deficit this year would be 8.5 percent of GDP, compared with the 7.6 percent target previously agreed with the troika.
Deficit Goals
Next year's gap is seen at 14.7 billion euros, according to an e-mailed statement from the finance ministry last night, that is less than the 14.9 billion-euro target under the previous pledge. The budget foresees a primary surplus of 3.2 billion euros next year, or 1.5 percent of GDP, according to the statement. The Finance Ministry said in a statement last night that the budget plan was “agreed with the troika.”
Greece's 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 gathering of European finance ministers in Luxembourg today. The region's policy makers have been urged by counterparts around the world to step up their response to the sovereign debt crisis, with U.S. Treasury Secretary Timothy F. Geithner saying last week that “it's time to move.”
Leveraging Fund
Bank of France Governor Christian Noyer today said he's “open” to the idea of using borrowed money to enhance the capabilities of the European Financial Stability Facility, the region's temporary rescue mechanism that is due to finance the second Greek bailout.
“It would be unrealistic to expect an increase in the EFSF itself,” Noyer said in a speech in Tokyo. “But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”
The meeting was originally due to coincide with the payout of the sixth installment of Greece's original rescue. The payment 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.
Firing Workers
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.
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.
Bloomberg News
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