Extreme Pressure To Trim Spending As Greece Looks For Bailout
by Hiland Doolittle
The 16-nation euro zone is grappling with the fiscal crisis in Greece. The country’s deep debt level has weighed heavily on both the euro and the British pound.
The stakes are high and may well get higher. According to an article in the Financial Times authored by billionaire investor George Soros, Greece is just one of several European economies in dire straits. The combined fiscal unrest in Spain, Italy, Portugal and Ireland will far outdistance the relatively minor problem in Greece.
Meanwhile, the pound is in turmoil. Amidst calls for more quantitative easing and political imbalances, the pound has dipped sharply against other world currencies, including the dollar. Advances in support for the Labor Party have caused concern among the country’s conservatives.
At the root of the problem in Greece is a mammoth 2009 deficit amounting to more than 12.7 percent of GDP. The cap for the EU members is 3 percent. Despite Greece’s pledge to reduce the budget deficit to 8.7 percent in 2010, the more stable European nations are publicly hesitant to come to the socialist government’s aid.
Germany Talking Tough
Greece has outlined several unpopular national cost-cutting measures. These preliminary and immediate steps include pay freezes, trimming of income supplements in the public sector, tax increases, an aggressive stance against tax evasion, increase in fuel duty taxes, raising the nation’s retirement age and cuts in all forms of public spending. The announcement of these measures led to a 24-hour national work strike.
Prime Minister George Papandreou has been considering additional measures and will need to make additional concessions to secure outside help. The still popular Prime Minister is said to be weighing a Value Added Tax, a luxury goods tax, a more aggressive fuel duty tax, a freeze in public pensions and even deeper public spending cuts.
There are several possible remedies for the Greek – EU situation. The EU ministers are scheduled to consider the Greek consolidation plan on March 16th. The clock is ticking as Greece needs to reorganize about 25 billion euros or $33.97 billion by late May.
The European Union’s biggest economy is Germany. Public statements between the two nations have been tense, at best. Prime Minister Papandreou is scheduled to meet with German Chancellor Angela Merkel in Berlin on Friday.
Publicly, Merkel insists that the problems in Greece belong to Greece. The Chancellor has been resolute in turning away any assurance that German aid stood ready. Public sentiment in Germany, Luxembourg and the Netherlands is strongly opposed to the use of tax revenue to bail out a loosely regulated economy. Germany does not want to set a precedent for bailing out failing European economies.
Currently, Greece pays 3 percentage points above the German bond yields to borrow in capital markets. Last week, Greece’s borrowing costs hit their lowest level since mid February. The decrease appears to be based upon promised tax increases.
European Central Bank Joins EU in Greece Monday
European Economic and Monetary Affairs Commissioner, Olli Rehn, and European Bank Chief Economist, Juergen Stark, met with top Greek economists on Monday. The purpose was to specify all necessary measures needed to trim 4 percent off the deficit by the end of 2010.
Behind the public scene, euro zone governments are furiously examining all possible measures to support the ailing nation with international bond markets. Merkel hinted as much when the Chancellor declared that the EU treaty did not include provisions to eliminate the guarantee of Greek debt through state-owned institutions.
French Economy Minister, Christine Lagarde has said that France was studying possible solutions to the Greek problem. Lagarde suggested a private-public venture might be the best remedy.
The Office of Debt Management in Greece has not released details of an expected bond auction. Most likely, this offering will not take place until all the government’s austerity measures are in motion.
A successful auction could ease the need for a severe rescue plan. To encourage investors, a preliminary interest rate of 7 percent is projected. If this auction fails, then 911 calls will be on the street and the euro will eel even more pressure. The stakes are indeed very high indeed in Greece and throughout the euro zone.
Tags: Bailout, British Pound, ECB, Euro, Germany, interest rates
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
