March 12 (Bloomberg) -- Greece is locked in talks with international creditors in Athens about shrinking the government workforce by enough to keep bailout payments flowing.
Identifying redundant positions and putting in place a system that will lead to mandatory exits for about 150,000 civil servants by 2015 is a so-called milestone that will determine whether the country gets a 2.8 billion-euro ($3.6 billion) aid instalment due this month. More than a week of talks on that has so far failed to clinch an agreement.
“Public sector job cuts are a major part of the program and they are one of the most politically difficult parts to achieve,” said Holger Schmieding, chief economist at Berenberg Bank in London. “And for the Greek government, which has two left-of-center parties, it is extremely difficult to really implement those job cuts. I’m afraid this will likely stay a point of contention, review after review after review.”
More than three years after revealing that Greece had misled its euro partners on the state of its finances, the nation remains reliant on loans from the euro area and the International Monetary Fund to pay pensions and wages. To qualify for payments from the total of 240 billion euros pledged to the country, it has to continue meeting economic targets, including reducing staff levels.
Greece’s 10-year bond yield has dropped 20 percentage points since reaching almost 31 percent in May, after euro area finance ministers revamped the country’s second aid program. Policy makers gave Prime Minister Antonis Samaras two extra years until 2016 to meet budget-reduction targets after he forged a coalition government following two elections that jeopardized the country’s survival as a euro member.
The yield on the government’s benchmark 10-year bond is about 10.61 percent, down from more than 11 percent a week ago and about half the average during the past year.
A Greek finance ministry official said March 10 that the government aims to finalize talks on the disbursement in the coming days. Under the bailout conditions adopted last year, Greece needs to cut public sector workers by 25,000 this year to move toward a goal of cutting 150,000 from its 2010 total by the end of 2015.
While state employees have borne the brunt of pay cuts, with incomes down by as much as 20 percent, their jobs are protected by the Greek constitution. Lower wages have eliminated “the differential growth rate with the rest of the euro area in public sector wages cumulated since 2000,” the European Commission said in December. “This does not exclude the need for further efforts given the debt problem and huge imbalances facing the Greek economy.”
About half of Greece’s general government spending goes to pay wages and pensions, according to data from the General Accounting Office. The country had 667,733 employees in the civil service on Oct. 1, a figure that doesn’t include state-run companies such as workers in public transit. The country has pledged to hold to an attrition rule of one new hire for every five or 10 retirees, depending on the different levels of government.
“It’s important to reduce in a sustainable way the burden to society from this over-bloated bureaucracy,” said Michael Massourakis, chief economist at Alpha Bank SA in Athens. “The important thing, of course, is that this is a milestone for the March disbursement of 2.8 billion euros, and if the negotiations break down, that will be a severe blow.”
Failure would have “market repercussions for Greece and should be avoided at any cost,” he said.
Politicians, including as Fotis Kouvelis, head of the Democratic Left, one of two junior partners in the coalition government, have argued that public sector job reductions will only deepen a recession that is in its sixth year. Gross domestic product contracted 6.4 percent in 2012. The European Commission forecasts it will shrink 4.4 percent this year.
The region of Attica, which includes the capital Athens and accounts for half the country’s GDP, had the highest jobless rate in December, according to figures provided by the Hellenic Statistical Authority on March 7. About 28.4 percent of its citizens were jobless, compared with 26.4 percent for the country as a whole. The seasonally adjusted unemployment rate fell for the first time in almost five years in December.
Joblessness among Greeks aged 15 to 24 is 57.5 percent, the highest in the euro area.
Locked out of the markets since April 2010, Greece is the only nation to receive two bailout packages from the euro area and IMF as public opposition to pension and wage cuts derailed the pace of promised economic reforms.
Loans to Athens were frozen in June as opposition to fiscal austerity grew. Greece held two elections in which anti-bailout parties gained, with Samaras emerging as head of a three-party coalition in favor of staying in the euro.
Euro region finance chiefs agreed in December to pay Greece 49.1 billion euros through March after revamping the second rescue. Greece received 34.3 billion euros in December, including funds for its banks, and 9.2 billion euros in January. It was due to get about 5.6 billion euros in two separate payments in February and March. The IMF is contributing a separate amount to Greece of about 3 billion euros this quarter.
“In the end, Greece will likely have to do more,” Schmieding said. “It will likely have to dismiss more people, but it will be a very difficult process.”
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