Oct. 31 (Bloomberg) -- Euro-area governments pressed Greece to make deeper spending cuts to keep aid flowing, in the latest test of wills during the three-year battle to prevent the single currency’s breakup.
With Greece pleading for a 31 billion-euro ($40 billion) aid payout in November and facing a sixth year of recession in 2013, euro finance ministers said unfreezing loans for the country required more efforts in Athens to rein in the budget deficit and deregulate the economy.
“We called on the Greek authorities to solve remaining issues so as to swiftly finalize the negotiations,” Luxembourg Prime Minister Jean-Claude Juncker said in an e-mailed statement today after leading a two-and-a-half-hour conference call with the finance chiefs. He said a scheduled Nov. 12 meeting of the ministers in Brussels would “seek to conclude on the program.”
Greece remains in intensive care after being rescued in 2010 in return for a prescription of budget cuts that Greeks increasingly resist. Failure to resuscitate Greece could threaten Europe’s effort to stem the crisis, which has also led Ireland, Portugal, Spain and Cyprus to seek emergency aid.
Greece, the epicenter of Europe’s debt crisis since revealing a bloated spending gap in late 2009, has faced regular demands to get a firmer grip on the budget or risk being forced out of the euro.
Almost a year ago, German Chancellor Angela Merkel and then-President Nicolas Sarkozy of France turned a planned Greek referendum on austerity into an in-or-out vote on the nation’s future in the 17-nation single currency. The warning, which led the referendum to be scrapped and then Greek Prime Minister George Papandreou to resign, cast doubt on European treaty provisions that call the euro “irrevocable.”
The current Greek government of Prime Minister Antonis Samaras wants two extra years until 2016 to meet targets for narrowing the deficit, a step that would create additional funding needs on top of 240 billion euros in aid pledges for the country since 2010. At the same time, Greece’s three-party ruling coalition is squabbling over creditors’ demands to scale back labor-market protection.
With 5 billion euros of 13-week Treasury bills expiring on Nov. 16, the Samaras government has been negotiating with the euro area and International Monetary Fund over the steps needed to qualify for the release of loan instalments frozen since June.
Juncker made no reference in his statement to a possible longer timetable for Athens. He cited progress toward an accord “including ambitious and wide-ranging measures in the areas of fiscal consolidation, structural reforms, privatization and financial-sector stabilization.”
The government in Athens may win “a somewhat flatter adjustment path” for meeting fiscal targets, Thomas Wieser, an Austrian who heads a group that prepared the euro-area finance ministers’ conference call, told German radio station Deutschlandradio Kultur today before the call. “It could be that it’s postponed by one or two years.”
Greece’s recession has driven unemployment to a record 25 percent, fueled domestic opposition to the pace of budget tightening and raised fresh doubts about the nation’s fitness for the euro. Meanwhile, in a bid to restore investors’ confidence in the single currency, euro-area governments have built a 500 billion-euro permanent rescue fund and the European Central Bank has pledged potentially unlimited purchases of the bonds of nations that sign up to fiscal rigor.
The Greek government today predicted a bigger economic contraction next year as it presented a 2013 budget that deepens cuts to pensions, wages and social benefits. The economy will shrink 4.5 percent next year, more than the 3.8 percent forecast in the draft budget on Oct. 1.
Greece narrowed its budget deficit from more than 15 percent of gross domestic product in 2009 -- five times the European Union limit -- to 9.4 percent in 2011. The spending gap is due to shrink to below 7 percent of GDP this year and to almost 5 percent in 2013.
Nobel economics laureate Christopher Pissarides said yesterday that the euro area should “be softer on fiscal austerity” in Greece to give “structural” policy changes, including in the labor market, time to work.
The next aid payout for the country would go mainly to recapitalize banks. That disbursement would be under a 130 billion-euro rescue package approved earlier this year after an initial 110 billion-euro bailout in 2010.
The latest rescue, which also included the biggest write-down of privately held debt, sought to help Greece reduce its debt to 120 percent of GDP in 2020 from about 144 percent now. The combination of Greek political indecision and economic weakness in recent months has pushed the country off the track to meet the 2020 target.
That has led Germany to say it is open to discussing a proposal backed the ECB, which holds around 45 billion euros of Greek government bonds, for a buyback of Greece’s debt. At the same time, Berlin has rejected any write-off of euro-area loans to Greece.
German Finance Minister Wolfgang Schaeuble said today after the call with his euro-area counterparts that “big advances” had been made on Greece while “a lot still needs to be done.” While calling Nov. 12 a “very ambitious” date for deciding on Greece, Schaeuble described the timeframe as “always manageable” and said he was “not concerned” about an upcoming German parliament vote on any revised aid program.
In an allusion to the domestic hurdle in Germany, Juncker said wrapping up any revamped funding package required Greek authorities to enact a series of previous commitments -- dubbed prior actions -- and “national procedures in member states” to be completed.
Objections in Greece to the spending cuts led to two parliamentary elections this year. After an inconclusive vote in May, the country held a re-run the following month in which Samaras’s New Democracy party remained the biggest in the Greek parliament while still lacking a majority.
Samaras formed a government with the Socialist Pasok, which came in third, and the sixth-place Democratic Left. The ruling coalition is an unprecedented attempt at political unity in Greece after an anti-bailout party called Syriza overturned four decades of dominance by New Democracy and Pasok with second-place finishes in the May and June elections.
“A lot of time has been lost because of two subsequent elections,” IMF Managing Director Christine Lagarde told Belgian newspaper De Standaard today. “Athens should get approval to spread its budgetary efforts over four years rather than two years.”
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