July 27 (Bloomberg) -- Bank of Greece Governor George Provopoulos called on the government to exceed its budget-cutting targets to restore investor confidence in the debt-ridden nation.
The European Union’s second rescue package for Greece provides “breathing space” that should be used “not only to put the program back on track, but to go beyond the targets of the program,” Provopoulos, who sits in the European Central Bank’s Governing Council, said in an interview in Athens yesterday. “If we did that -- and we certainly can do that -- we would help turn around the psychology of the market.”
Greek lawmakers on June 29 backed a 78 billion-euro ($113 billion) austerity plan that was a condition for receiving another EU bailout. The program aims to reduce the budget deficit to 1.1 percent of gross domestic product in 2015 from 10.5 percent last year. Spanish and Italian bond yields are nevertheless rising on investor concern that the crisis will spread as Greece teeters on the brink of a debt default.
“It will take some time for Greece to overcome its problems,” Provopoulos said. “Our European partners have gone the extra step in providing a new adjustment package. Now, the ball is in our court and we have to work hard, indeed much harder from now on.”
He said the government “will be successful in fully implementing the program” and that the country will regain access to debt markets “sooner rather than later.”
Greek two-year bond yields, which spiked above 40 percent on June 20, were at 29 percent today. Italy’s 10-year yield rose five basis points to 5.70 percent while similar maturity Spanish yields gained 11 basis points to 6.08 percent.
Euro-area leaders last week approved an additional 159 billion euros in rescue funds for Greece, including 50 billion euros in projected contributions from private investors. Greece’s credit rating was this week cut three steps by Moody’s Investors Service, which said the bailout amounts to a default because of the losses investors will incur.
Under the terms of the package, Greek Prime Minister George Papandreou has pledged to raise 50 billion euros from state asset sales and impose levies ranging from 1 percent to 5 percent on wages. He also plans higher taxes on restaurants, bars and heating oil.
While the Greek economy is projected to contract 3.8 percent this year, the Frankfurt-based ECB has twice raised interest rates to stem euro-area inflation.
Provopoulos, 61, said the ECB’s benchmark rate is appropriate at 1.5 percent and there’s no evidence that higher commodity prices are fueling excessive wage increases, or so-called second-round effects.
“We don’t have evidence up to now of second-round effects, while inflation expectations are firmly anchored,” he said. “We will continue to monitor very closely all developments with respect to upside risks to price stability.”
Euro-area inflation is running at 2.7 percent and has been in breach of the ECB’s 2 percent limit since December.
“I expect that inflation will remain above the 2 percent level in the coming months before falling below that level in late 2011 and in 2012,” Provopoulos said. Still, “if there are inflationary pressures we’ll act accordingly, no matter what is happening on the fiscal front.”
To contact the editor responsible for this story: Craig Stirling at email@example.com