Just two days before German lawmakers are set to ratify an overhaul of the euro rescue fund, Greek Prime Minister George Papandreou traveled to Berlin to appeal for support to avert default. Greek leaders have been extolling the success of their austerity measures in balancing the budget, looking for support both at home and abroad, as parliament prepares to vote on an unpopular property tax needed to avoid default.
Concern that Europe would not be able handle its debt crisis, plunging the global economy into another recession, dominated weekend talks in Washington, where met policy makers, investors, and bankers from the International Monetary Fund, World Bank, and the U.S. government.
Late yesterday, President Barack Obama said European governments are “trying to take responsible actions, but those actions haven’t been quite as quick as they need to be,” while his treasury secretary, Timothy Geithner, said Europe has “not very much time” to act. Geithner said that European leaders needed to increase funding through the European Financial Stability Facility, now valued at roughly 440 billion euros, warning that failure to do so threatened “cascading default, bank runs and catastrophic risk.”
The IMF and World Bank held their annual meeting in Washington this weekend, where they received a “wake-up call”, according to Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., the world’s largest manager of bond funds. “What I learned in Washington is that Europeans finally get it,” said El-Erian. “They are going back and will try to do something about it.”
Meanwhile, Papandreou faces another unpopular vote, with debate scheduled to start at 6 p.m., and will have to rally his Pasok socialist lawmakers, which account for 154 votes in the 300-seat chamber, if the austerity measures are to be approved. The parliamentary votes will likely be close, and “some Pasok deputies could resign ahead of the crucial voting sessions,” said Wolfango Piccoli, an analyst at Eurasia Group in London, “but the government is expected to secure the parliamentary approval for the necessary laws and the release of the 8 billion-euro loan.” Greece must fully implement its savings plans in order to qualify for its next installment of aid.
Papandreou, who will dine with German Chancellor Angela Merkel while in Berlin, has vowed that Greece will be able to overcome the debt crisis with the help of stronger leadership from policy makers. Speaking to the German industry federation, the Greek Prime Minister said that he expected the “huge” primary budget deficit in 2009 to have become a primary surplus by next year. “We are not a poor country, we’re a country that has been governed badly,” said Papandreou, stating his believe that Greece, and Europe, could achieve success in surmounting the crisis through global cooperation.
Greek Finance Minister Evangelos Venizelos announced an additional 20% wage cut for government employees, on top of 15% for the civil service and 25% for the wider public sector, as well as an average 4% reduction in pensions in addition to a previous 10% cut. Plans to lower the tax-free threshold to 5,000 euros means the vast majority of Greeks will be looking at higher taxes. But the most contentious issues are a property tax to be levied via electricity bills, expected to provide an annual yield of 1.1% of gross domestic product, and plans to cut 30,000 public servants into a “reserve” system on reduced pay. While the issued are set to be voted on this week, implementation laws won’t be approved until October, according to Venizelos.
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The government faces serious opposition to the new austerity measures, with surveys showing that 74% of Greeks oppose the property tax. Unions have already called for general strikes on October 5 and October 19, while public transportation companies have held strikes over the past few days. “Implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will mount significant resistance, raising the risk of inertia and inaction,” said Piccoli.