FRANKFURT — Greek leaders struggled through the weekend to agree to a set of radical budget reductions that would satisfy foreign lenders’ demands even as they tried to stave off mounting resistance to those cuts at home.
Reflecting the urgency of the situation, Prime Minister George A. Papandreou canceled a planned trip to Washington this week and held talks with his cabinet on Sunday.
The Greeks face an October deadline to qualify for 8 billion euros, or $11 billion, in aid, without which Greece will certainly default on its growing debt. Over the weekend, European finance ministers issued stern warnings at a meeting in Poland that failure to meet financial targets would imperil the release of the payment.
The payment is just one installment in a larger package of 110 billion euros in aid agreed to by euro zone members in spring 2010; a second bailout fund, for 109 billion euros, was agreed to in July, though that has yet to be ratified.
To reach the financial targets, Greek leaders discussed a range of draconian layoffs and pay reductions among public sector workers. While these measures have long been planned, but never carried out, to the frustration of foreign lenders, the discussion of these cuts represented a marked change in approach for the Greek government, with the emphasis on reductions over revenue increases.
“Everyone wants a smaller state,” the finance minister, Evangelos Venizelos, said on Sunday.
More specifically, Greece officials are being pressed to put thousands of civil servants deemed to be “surplus” on a standby status at a reduced wage. The government has not yet pushed ahead with this measure, which is very unpopular in a country where nearly one million people out of a population of 11 million work for the government.
Several Greek news media outlets, including the influential center-left newspaper To Vima, on Sunday cited an internal government e-mail that set out priorities by Greece’s foreign creditors aimed at raising much-needed revenue quickly. These include cuts in the pensions of Greek sailors and employees of the state telecommunication company OTE, the immediate merger or abolition of 65 state agencies and the freezing of state workers’ pensions through 2015.
Adding to the Greeks’ dilemma is that the proposed cuts come as the Greek economy is contracting faster than expected. Last week, Mr. Venizelos warned that the economy would shrink much more sharply this year than anticipated — by 5.3 percent instead of the 3.8 percent originally forecast in May. The budget deficit is on track to reach 8.2 percent of gross domestic product this year, well ahead of the original estimate of 7.4 percent.
The original aid package requires Greece to reduce its deficit to 7.5 percent of gross domestic product this year, and below 3 percent by 2014, according to the International Monetary Fund.
The reduced number of workers employed in the public sector would only add to the difficulty of meeting these targets as payroll tax collections shrink.
Despite the dire circumstances, Mr. Venizelos denied rampant speculation that the country was on the brink of default.
Acknowledging that the mood in both Greece and the euro zone is “fluid and nervous,” he said the country was committed to taming its widening budget deficit and carrying out reforms, one of which is a new levy intended to ensure that property owners pay taxes, a persistent problem in a country beset by tax evasion.
Mr. Venizelos said that the government would make the long-delayed cuts to the public sector, though he also lashed out at “those intent on speculating against the euro and carrying out organized attacks on the heart of the euro zone.”
On Monday, Mr. Venizelos will have a chance to make his country’s case in a conference call with representatives of the foreign lenders known as the troika: the European Commission, the European Central Bank and the International Monetary Fund.
Public sector workers in Greece have shown little appetite for the cuts that have already been made, let alone those being proposed. Over the summer, protests have turned violent as workers have bristled at the new austerity measures.
In Germany, the mood seemed to be turning increasingly in favor of letting Greece fail rather than to bear the growing cost.
Wolfgang Schäuble, the German finance minister, repeated warnings that Greece would not receive any more aid unless it kept promises it had made to the International Monetary Fund, the European Commission and the European Central Bank to cut government spending and improve the economy.
“The payments on Greece are contingent on clear conditions,” Mr. Schäuble told the newspaper Bild am Sonntag.
As the largest country in the euro area, which has 17 European Union members, Germany is the biggest contributor to a bailout fund meant to help Greece as well as Portugal and Ireland continue to pay their debts while their economies recover.
Voters in Berlin, at least, did not punish Chancellor Angela Merkel for her handling of the debt crisis. Her Christian Democratic Union gained two percentage points in regional elections on Sunday compared with the last election five years ago, winning 23.4 percent of the vote. The Social Democrats, who have generally been supportive of aid to Greece, remained in power with 28.3 percent.
Support for the Free Democrats, whose leaders have been among the most vocal critics of Greek aid, plunged to 1.8 percent from 7.6 percent in 2006. That is below the 5 percent needed to seat representatives in the state Parliament.
The European Central Bank will also play a role in the decision of whether to continue aid to Greece, and has a strong interest in preventing a Greek default.
The central bank has spent an estimated 40 billion to 50 billion euros buying Greek bonds in an ultimately unsuccessful attempt to hold down the yield, or effective interest rate. It might need to rebuild its capital if those bonds default and will do all it can to dissuade political leaders from allowing Greece to fail.
In the end, when political leaders do the math, they may realize it is cheaper to save Greece than engineer a bank rescue only two years after the last round of bank bailouts, analysts said.
“There is no political advocacy for such a prospect in Greece or in Europe as it would signal the beginning of the unraveling of the euro zone,” said George Pagoulatos, a professor at the Athens University of Economics and Business. “The markets would start attacking Portugal and Ireland, and the domino would stop somewhere around France.”
Jack Ewing reported from Frankfurt, and Niki Kitsantonis from Athens. Stephen Castle contributed from Wroclaw, Poland.
Article source: http://feeds.nytimes.com/click.phdo?i=cee775fb6ce825a014a558f9f85c32e6
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