Greece Cutting Back to Court EU Favor

Greece unveiled its third austerity plan Wednesday and was met with praise from the European Union (EU), European Central Bank (ECB), and the International Monetary Fund (IMF), but hostility from the Greek public.

The plan consists of spending cuts and tax increases that will cut the budget deficit by $6.5 billion, and help Greece to reduce its current deficit to 8.7% of gross domestic product (GDP) from 12.7%.

"This was a necessary decision. It was not a matter of choice," said Greece's Prime Minister George Papandreou. "It was a matter of survival for our country, allowing it to breathe and break free from the clutches of speculative forces."

Initial market reaction was promising. The euro rose Tuesday and the spread between Greek and German 10-year bonds narrowed to less than 300 basis points - important for future Greek borrowing.

Greece is scrambling to borrow funds to pay back $25 billion in bonds that are set to mature in April and May. High borrowing costs have plagued the debt-laden country, restricting its ability to meet financial obligations.

Credit ratings agencies Moody's Corp. (NYSE: MCO) and Fitch said they would maintain Greece's current credit ratings as long as the deficit-reduction plan is followed through.

"Considering that currency devaluation is not an option, Greece's austere packages must go the extra mile in keeping credit rating agencies at bay and securing the necessary backing to enable the tapping of international bond markets," Ashraf Laidi, chief market strategist at CMC Markets, told MarketWatch.

Winning Over the EU

The EU is pressuring Greece to take more aggressive actions to curb spending, not just to prevent a sovereign default, but to justify a potential bailout down the road.

"Today's announcement is as much about giving other EU governments more political capital in the event that they do eventually need to provide liquidity to Greece," Gary Jenkins, head of credit research at Evolution Securities Ltd. in London, told Business Week. "They can make the claim to their own taxpayers that Greece has taken further measures as suggested by the EU."

The plan release came just days before the prime minister was set to meet with Germany and France to discuss Greece's fiscal situation. While saying they support Greece's actions, German Chancellor Angela Merkel and French Finance Minister Christine Lagarde have both also said no aid will be handed to Greece during the upcoming meetings, although there were some solutions being worked out if needed.

Greece has repeatedly said it would turn to the IMF if funds were needed, although there has been no confirmation from the IMF that it would assist. The EU strongly opposes the scenario, saying it would undermine the idea that the European nations can dig themselves out of a crisis.

Greek Tragedy

The importance of Greece finding support from others for its drastic financial makeover means sacrificing support from its own citizens, whose future spending and consumer behavior will keep the company afloat in years to come. 

The controversial provisions that enraged Greek civil servants include a 30% decrease in holiday bonus pay, a 12% decrease in other supplemental salary, pension freezes and tax increases. Union workers stormed the finance ministry in protest and planned a three-hour strike Friday and a 24-hour strike March 16.

"The measures are lopsided," said Yannis Panagopoulos, president of Greece's biggest labor union. "There is no sense of social justice."

"We're being asked to pay for the crisis. Greek taxpayers are being asked to foot the bill again," Dimitris Bratis, president of the Greek teaching federation, told Bloomberg News. 

Cutting government pay is a common budget-reduction tactic, but too much of a reduction could cripple the country's chance for sustainable economic activity.

"The problem isn't just about finding the money or securing another loan," says Savas Robolis, an economics professor at Panteion University in Athens. "The problem is what comes next, after the bailout. Without development we are heading into a deeper and darker recession. If no development plan is incorporated in the government's design to yank the country out of crisis, then we're doomed."

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