Will Greece’s New Austerity Measures Be Enough?
The Greek cabinet is expected to announce major public sector layoffs, more spending cuts, and tax increases this afternoon. European Union and International Monetary Fund officials have pressed the Greek government to institute further austerity measures in order to shrink its deficit. Greece has been under review to determine whether it has lived up to the conditions of its bailout.
While Greek Finance Minister Evangelos Venizelos has acknowledge that Greece’s economy would have been “derailed” had it not been for the bailout, he also said that the EU had failed to manage the debt crisis as quickly and decisively as required. Venizelos admitted that they needed to take additional measures, but said the country needs the help of its international leaders, who have forced Greece to into a string of unpopular tax rises, pension cuts, and economic reforms since May 2010 as part of the terms of its bailout. In order to receive an 8 billion-euro loan disbursement next month, EU/IMF troika officials are pushing Greece to accelerate its austerity and reform drive.
Troika inspectors who walked out of Athens on September 3 after uncovering a new deficit shortfall will return to Athens early next week to complete their quarterly review of progress on Greece’s adjustment program. It now seems likely that Greece will receive its next tranche of aid, as scheduled, even if only to buy time for European governments to recapitalize banks with high levels of exposure to Greek finances and to strengthen the euro zone’s rescue fund that it might better withstand a Greek default in the near future.
A Finance Ministry official has said that Venizelos has agreed to a “mid-term plan” to slash the deficit through 2014 and sell some 50 billion euros in state assets. The deficit-cutting measures are expected include more government employee layoffs, pension and wage cuts for civil servants, increases in heating fuel tax, and a previously-announced extension of a one-off property tax.
The Greek government has already said that it will immediately put 3,000 public employees into a “labor reserve”, in which they draw 60% of salary for a year while they look for another state job. Another 20,000 are likely to be added to that number. After twelve months, reserve workers can’t find a new position, they will be let go. The government estimates that putting people in the labor reserves saves about 12,000 euros per year per worker. The measure is part of Greece’s commit to cut the civil service payroll by having 150,000 fewer civil servants by 2015 — that’s roughly 20% of the current total. The troika wants Greece to speed up the layoffs.
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Meanwhile, the IMF has recognized the need for banks to boost their capital in order to withstand potential losses incurred by the sovereign debt crisis sweeping Europe. And with private investors wary of putting their money in unstable financial markets, public authorities may have to get involved, though IMF chief economist Olivier Blanchard says outright nationalizations are not necessary. An IMF call for widespread bank recapitalizations last month met with stiff resistance from European governments, but after a weekend meeting of EU finance ministers and central bankers, Blanchard says that may be changing.
“The position of most European countries is, yes, we have a problem, capital needs to be put into the banks,” he told news channel France24. “It seems to me there’s been a 180-degree change in a lot of countries.” A Barclays Capital note said that European Banks could need up to 230 billion euros in order to preserve a 6% core Tier 1 ratio should Greece, Ireland, Portugal, Italy, and Spain all face 50% cuts to sovereign debt. Of course, that figure would be far smaller if only Greece were provisioned.
European banks have suffered a steep sell-off this week as investors flee those most exposed to Greek debt, with French banks some of the hardest hit. Head of the Germany’s number two lender, Commerzbank CEU Martin Blessing has said that euro zone leaders may have bought themselves some time by setting up the EFSF rescue fund, but that it failed to lead them out of the crisis. “I believe we have reached a crossroads,” said Blessing. “A monetary union without a fiscal union — this construct has failed.” In order to save the single currency, the euro zone must move toward a fiscal union.
However, for the time being, finance chiefs from the BRIC group — Brazil, Russia, India, and China — are meeting this week in Washington, D.C., to discuss the possibility of investing in troubled euro zone sovereign bonds. According to Reuters, between them, the four countries have $4.3 trillion in hard cash reserves, of which three quarters is held by China, and they hope to help relieve intensifying global financial stress.