Greece admits it must cut deficit to remain 'sovereign'

THE GREEK government has declared its determination to bring a ballooning budget deficit to heel without external aid, suggesting the country’s survival as a sovereign state is at stake.

As financial markets continued to punish Greece over the state of its public finances amid mounting concern in Brussels, Greek prime minister George Papandreou took the unusual step of televising a cabinet meeting in an effort to demonstrate that his government understands the severity of its situation.

The country’s problems have increased scrutiny in the markets over other debt-dependent states, Ireland among them.

With a downward revision of Spain’s outlook to negative by Standard Poors yesterday coming after a downgrade of Greece by Fitch, the spread between Irish bonds and equivalent German ones widened yesterday to 190 basis points from 170 basis points.

The comparable Greek spread hit 225 basis points, the highest level since April.

Mr Papandreou’s socialist administration has been under acute pressure since it came to power after a snap election in October and disclosed that the budget deficit will reach 12.7 per cent of gross domestic product this year, more than twice the previous forecast.

With its credit rating cut to the lowest level in a decade, the EU authorities and fellow EU members have intensified pressure on the government to put its house in order.

“We must close the credibility gap to survive as a sovereign and cohesive nation,” Mr Papandreou told his cabinet yesterday. “We are determined to do whatever it takes to control the huge deficit.”

His remarks followed a statement from EU economic and monetary affairs commissioner Joaquin Almunia, who said late on Tuesday that a difficult situation in one single currency member was “a matter of common concern for the euro area as a whole”.

Athens received a similar message on Monday from the European Central Bank, whose president Jean-Claude Trichet called on the Greek government to act “courageously” to take control of the situation.

Even as Mr Papandreou and his finance minister George Papaconstantinou sought to send reassuring signals yesterday, French finance minister Christine Lagarde reiterated concern expressed last week by all EU finance ministers.

While Ms Lagarde said she did not think Greece could go bankrupt, she said it must make a real effort to clean up its public finances.

“No we are not a new Iceland, just like we are not the new Dubai,” Mr Papaconstantinou told reporters, adding that the country needed no saviour, even though it benefited from the EU umbrella.

“We are a sovereign state which is part of the EMU [European Monetary Union], which has a very clear understanding of the serious situation that it has inherited, and which is taking all the necessary measures.”