EU and IMF press Greece to clarify austerity plan

Tue, Oct 2, 2012, 01:00

THE GREEK government faced demands for further “clarifications” from the European Union-International Monetary Fund “troika” as it sought the approval of its international lenders for a drastic new austerity plan in return for further bailout aid.

As talks resumed in Athens after a week-long hiatus, draft budget documents suggested the country will endure a sixth successive year of recession as its government tries to advance a budget package that includes some €12 billion in austerity measures.

The troika must give its blessing to the plan if Greece is to receive a €31.5 billion tranche of aid under its second international bailout.

The country needs the money to avert a further default on its debts, something which could lead it out of the single currency. While EU leaders want to avoid this, they are putting Greece under mounting pressure to radically escalate the effort to balance the books.

“There are discussions on the measures. The troika wants clarifications,” Greek finance minister Yannis Stournaras said after meetings with inspectors from the EU Commission, the European Central Bank and the IMF.

“We must hold on tight to the helm to make the difficult turn . . . It’s the only way for the Greek economy to return to the righteous cycle of fiscal stability and growth.”

Amid doubt in the troika over €2 billion in the measures proposed by Greece, the talks are taking place against the backdrop of renewed anti-austerity protests in Athens.

New European figures yesterday showed Greece recorded the highest increase in unemployment in the EU in the year to June, with the jobless rate climbing to 24.4 per cent from 17.2 per cent. This was second only to Spain, whose unemployment rate stands at 25.1 per cent.

The troika officials had left Athens last Friday week for a “brief pause” in its dialogue with the government, following angry exchanges between Mr Stournaras and IMF mission chief Poul Thomsen over the IMF’s demand for more tax increases and wage and pension cuts.

The latest two-year plan would emphasise spending cuts – including reductions in public salaries, pensions and welfare payments – over taxation measures. Healthcare, education and defence cuts are also likely.

Some local reports suggest a package of €13.5 billion may yet be in store, considerably more than mooted at the outset of the talks.

Greece has sought additional time to balance the books, arguing that an intensification of the austerity would deepen its prolonged and worsening recession. This, however, would necessitate increased bailout aid.

Some of its lenders – notably the IMF – have indicated a willingness to grant more time to the country but Germany and its allies have adopted the line that they cannot expand the overall bailout package, worth some €130 billion.

The Institute of International Finance, the global banking lobby that negotiated private sector involvement in the second bailout, said in a report yesterday that uncertainty over modifications to the programme was among its chief concerns in the euro zone.

“Economic conditions have deteriorated much more than assumed in the EU-IMF programme. The government seeks to negotiate an extension to the programme deadline,” said the IIF.

While there is some expectation in European circles that a compromise can be found eventually, the draft budget for 2013 points to a continuation of acute economic distress in the country.

The draft suggests the economy will decline by a further 3.8 per cent next year. This follows the 6.5 per cent drop forecast this year and would bring the cumulative economic contraction since 2008 to some 25 per cent.

The plan puts Greece in line to achieve a primary surplus of 1.1 per cent of economic output next year for the first time in 11 years, meaning the government would be in surplus before making interest payments to service the national debt.

The target for a primary surplus this year will be missed, the draft indicates. The deficit is projected to reach 6.6 per cent of gross domestic product this year and to decline to 4.2 per cent in 2013.