Greece deepens cuts; ‘IMF option’ open

UPDATED:

ATHENS — Greece announced painful new austerity measures Wednesday, cutting salaries for government workers and raising taxes at the cash register, winning approval from the European Union as it tries to snuff out a financial crisis that threatens Europe’s economy.

The government also said it wouldn’t rule out turning to the International Monetary Fund for help, a move that has been resisted by the EU.

The new measures amount to a savings of 4.8 billion euros ($6.5 billion), or roughly 2 percent of the Greek economy.

Bond ratings agencies, whose approval is crucial to taking pressure off Greece’s finances, liked the plan. Moody’s said it was a “clear manifestation” of resolve to regain control of Greece’s strained public finances and increase the probability that the debt situation in Greece will be stabilized.

The cuts are aimed at winning European Union support for the country’s efforts and possibly opening the door to a financial backstop by fellow European governments. That would pave the way for a bond offering in the coming days that is needed to roll over debts that are coming due. Greece must roll over 54 billion euros ($74.1 billion) this year.

A Greek default or an expensive bailout would be a blow to the euro and the 11-year-old project of running a shared currency.

Greek officials won verbal support from EU leaders but also said they would not rule out IMF help. The IMF already is offering advice, but European Union officials have said an IMF bailout is not needed.

“Obviously we would like EU solidarity and whatever support there would be to come from within the eurozone. But we cannot responsibly say that the IMF option — as much as we do not want it — can be ruled out,” Finance Minister George Papaconstantinou said.

“It’s not a threat. It’s a responsible position for a (government) in the month of March, which has the borrowing needs that it has and with the spreads that it has.

Analysts say IMF intervention is opposed for political reasons, not least because IMF head Dominique Strauss-Kahn is a potential election opponent for French President Nicolas Sarkozy, who could be reluctant to see Mr. Strauss-Kahn as the rescuer of the euro.

The measures contain 2.4 billion euros ($3.3 billion) in new revenues such as taxes and another 2.4 billion euros in spending cuts. They include cuts in civil servants’ salaries; pension freezes; a sales-tax, or VAT, increase from 19 percent to 21 percent; and an increase in taxes on alcohol, cigarettes, luxury cars, yachts, precious stones and leather goods, among others.

EU Commission President Jose Manuel Barroso and the head of a group of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, both said they were confident Greece now could reduce its deficit by the required 4 percentage points this year and said the country’s ambitious program “is now credibly on track.”

Some finance officials and economists have argued that the Washington-based IMF is the right body to give Greece a financial backstop since it has extensive experience in bailouts and enforcing agreed cutbacks. Some even have called for the EU to create a European Monetary Fund to assist members in trouble.

Simon Johnson, an economist at the Massachusetts Institute of Technology’s Sloan School of Management and a former economist at the IMF, told the Associated Press last week that Greece quietly approaching the IMF could drive the EU “nuts,” allowing Greece to negotiate a better deal with its partners in the EU.

There’s mounting talk that Mr. Strauss-Kahn may present himself as a Socialist candidate in the next French presidential election due in 2012.

“Sarkozy absolutely does not (want) Strauss-Kahn to do anything that can be presented as a statesmanlike contribution to the world,” Mr. Johnson said.

Hans Redeker, a senior analyst at BNP Paribas, thinks that in the case of the IMF coming in it would provide Greece something similar to what it gave Hungary — around 20 percent of the country’s economy, in this case about $45 billion.

Mr. Redeker said the only reason why German Chancellor Angela Merkel would promote an intra-EU solution is related to French domestic politics.

“President Sarkozy wants to keep the IMF out, not providing IMF’s chief, Strauss-Kahn, a European platform,” Mr. Redeker said.

IMF help, however, would highlight the European Union’s inability to manage the crisis on its own. Mr. Strauss-Kahn has said the international lender is ready to help if asked but understands that the EU is unwilling.

Greece has come under intense pressure from the European Union to tame its finances, which include a budget deficit that stands at a staggering 12.7 percent of gross domestic product in 2009. Athens has promised to reduce it to 8.7 percent this year, but many economists consider that goal unrealistic.

Greece wants EU help to borrow money at lower rates, but European officials have remained tightlipped over any potential rescue plan, insisting Athens first must improve its finances. Greece’s financial crisis has severely shaken confidence in the euro, the common currency of 16 nations. It also has led to market expectations of some sort of rescue led by the German and French governments.

UniCredit analyst Tullia Bucco said in a Wednesday research note that reducing the compensation of Greek government employees represents an important area of potential savings, as could a reform of the country’s pension scheme.

UniCredit said Greek pension expenditures currently absorb nearly half of the resources devoted to social payments, while the effects of population aging will become critical by the end of the decade.

“Reforms to boost potential growth, while currently not on the government agenda, won’t come a moment too soon to make the fiscal adjustment more tolerable,” Ms. Bucco said.

Greek Prime Minister George Papandreou is due to hold talks with German Chancellor Angela Merkel Friday and will travel on for meetings with Mr. Sarkozy in France and President Obama in the United States.

But Christoph Steegmans, a spokesman for Mrs. Merkel, said Mrs. Merkel’s meeting with Mr. Papandreou is not meant to involve “pledges of help.”

German Finance Minister Wolfgang Schaeuble said the decisions “go in the right direction and deserve our respect. Our Greek partners thereby show their responsibility for Europe and the common currency. Now, it is decisive for Greece to speedily and fully implement all its decisions.”

As soon as this is done, the markets’ trust clearly should be strengthened, and Greece should be able to refinance its debt on the markets, he said.

“All this taken together is of high importance for the stability of our common currency,” Mr. Schaeuble said.

Associated Press writers Aoife White in Brussels; Juergen Baetz and Matt Moore in Berlin; George Frey in Frankfurt, Germany; Pan Pylas in London; and Derek Gatopoulos and Elena Becatoros in Athens contributed to this article.