November 18, 2010

New Greek Budget Cuts Deep; Strikes Threatened

Final vote by Greek parliament expected Dec. 22

Taking draconian measures that include slashing from already austere public spending and raising taxes, Greece unveiled its new proposed budget on Thursday. New plans call for further reduced government spending, particularly in health, and for freezes in pensions, levies on profitable companies and hikes in VAT rates on food and other basics from 11% to 13%. The budget is intended to cut its public deficit to 7.4% of GDP, according to a BBC News report.

Reuters reported that both public and private sector unions are planning a 24-hour strike action in protest. Yannis Panagopoulos, head of the private sector union GSEE, said in a statement, “Our fears are confirmed. Unprecedented austerity will hurt all civil servants and private sector workers, with no exception. We will strike on Dec. 15, and take further action.”

Public feeling is running high against the austerity measures already in place, as well as against Germany. A mostly peaceful demonstration Wednesday night outside the U.S. Embassy in Athens, commemorating the anniversary of a 1973 anti-dictatorship uprising, included protestors carrying banners that criticized the International Monetary Fund (IMF) and the European Union (EU). The Associated Press also reported that demonstrators chanted against unemployment and new strictures. Some trouble was reported, with riot police employing stun grenades and tear gas against anarchist protesters. There was also trouble with demonstrations in Thessaloniki and Patras.

Not just Greece, but also Ireland, Spain and Portugal have accused Germany of being the architect of some of their woes after Angela Merkel, Germany’s chancellor, publicly addressed the possibility of bond defaults and called for bondholders to share in any losses that resulted. This drove up the cost of borrowing for each of those nations and increased their immediate problems.

An AFP report said that, although Greece’s sales tax had already been raised twice in 2010, the additional tax measures, such as the increased VAT, were necessary to offset an upwardly revised public deficit figure. Some luxury items also will most likely be moved to a 23% tax bracket.

Originally calculated at 13.6% of GDP, the 2009 deficit balance was raised by Eurostat, the EU statistics agency, to 15.4% of GDP. This revision meant that the 2010 budget deficit is now coming in at 9.4% of output, higher than Greece’s target of 8.1%. Currently Greece’s debt is at 143% of its GDP; in 2011 it is projected to rise to 153% of GDP.

In an effort to stimulate the economy, the budget also includes provisions to lower the VAT for tourism enterprises and drop the tax rate on retained corporate profit to 20%, according to a Reuters report.

While the budget will be under discussion before the Greek parliament and can still be changed before the final vote on Dec. 22, it’s expected to pass. The steps already taken to cut the deficit have triggered a deep recession, with GDP seen contracting 4.2% this year. Further austerity measures are anticipated to further hurt the economy, with no guarantee that they will enable Greece to avoid a complete restructuring.

It is still unclear whether Austria will release funding for the third tranche of financing to Greece, in the wake of a statement by its finance minister that Greecehad not fulfilled its obligations. Funding is due to be released on Nov. 30, if auditors of Greece’s books give the okay. A holdup in funding until January has been rumored but not confirmed.

To read more about the Greek debt crisis, go to AdvisorOne.com.

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