The Bitter Pills in the Plan to Rescue Greece

The Bitter Pills in the Plan to Rescue Greece
By DAN BILEFSKY and LANDON THOMAS Jr.
Copyright by Reuters
Published: April 30, 2010
http://www.nytimes.com/2010/05/01/business/global/01euro.html?th&emc=th


ATHENS — Racing to secure financial aid and avoid a debt default, the Greek government has agreed to austerity measures totaling 24 billion euros (about $32 billion) that will include cutting some workers’ pay and some public sector jobs as well as opening up parts of the economy, Greek officials said Friday.

A letter of intent with the International Monetary Fund was mostly complete, according to one government official, who declined to be identified because of the confidential nature of the discussions. A deal could be announced by Sunday, this official said.

As unions denounced the cost-cutting measures and pledged to take to the streets over the weekend and go on strike on Wednesday, Prime Minister George Papandreou said Greece must quickly adopt the international aid plan. “Today, the top priority is the survival of the nation,” he told Parliament on Friday. “This is the red line.”

The euro gained against the dollar for a third day, rising to $1.3312, as fears that Greece’s turmoil could spread in Europe were surpassed by relief that a bailout was imminent.

The details of the plan have been settled in negotiations here with officials of the European Union, the I.M.F. and the European Central Bank. Greek officials close to the discussions said the deal would include as much as 130 billion euros in aid over the next three years at reasonable interest rates. In return, the I.M.F. asked Greece to cut public sector spending by 8 billion euros in the 14 months after the plan was adopted. Economists called that provision crucial because past reform programs by the government have relied too much on overly optimistic assumptions about the collection of unpaid taxes.

Union and government officials said Greece had also pledged to raise its value-added tax to 25 percent, to freeze civil servants’ wages and to eliminate public sector bonuses amounting to two months’ pay. They said the government intended to increase taxes on fuel, tobacco and alcohol.

Among the most significant features of the plan, a Greek government official said, would be a measure making it easier for the government to lay off some of the many thousands of public sector workers, whose low levels of productivity and high wages are a big contributor to Greece’s debt problem. Until now, the government has not been able to lay off civil servants, whose employment rights are in effect constitutionally guaranteed.

Another reform high on the list is removing the state from the marketplace in crucial sectors like health care, transportation and energy and allowing private investment. Economists say that the liberalization of trucking routes — where a trucking license can cost up to $90,000 — and the health care industry would help bring down prices in these areas, which are among the highest in Europe.

Some analysts fear the austerity measures could push Greece into a deeper and prolonged recession and spur widespread social unrest.

But Yiannis Stournaras, a leading economist and former economic adviser to the ruling socialist party, said a majority of Greeks had lost the will to rebel. After years of profligate spending, he argued, Greece is being forced to make changes that would improve its competitiveness in the longer term.

“In any other situation the reaction would be fierce, but while the Greek people are angry, there will not be a widespread revolt because they realize that the alternative is for the country to go bankrupt. We have no other choice.”

As Greek television stations reported on the aid plan, European leaders sought to reassure jittery markets, dismissing calls by some economists for Greece to restructure its debt.

Amadeu Altafaj, a spokesman for Olli Rehn, the European Union’s monetary affairs commissioner, said European officials were engaged in what he described as “fire brigading” to ensure stability “on the Greek front.” There would be “no restructuring of the debt,” he said. That’s “not even part of the debate in Athens.”

He insisted that no discussions were taking place about whether other euro zone countries could have access to similar financial aid if needed. In recent days debt markets have come under pressure in Portugal and Spain.

Meanwhile on Friday in Germany, where the government has equivocated for months, the finance minister, Wolfgang Schäuble, reiterated a pledge to take swift action to help Greece. Chancellor Angela Merkel faces a regional election in the country’s most populous state, North Rhine Westphalia, on May 9. But Mr. Schäuble, apparently alluding to what was at stake for the euro zone, indicated it was important to maintain the stability of the euro.

“Germany will take a major part in coming to the assistance of Greece,” he said. “Opposition groups will not block this. Given the mood in the public in Germany, everyone in politics knows that not being helpful is not a good argument to win regional elections.”

In Athens, where the prospect of a rescue has been greeted with a mix of relief and wounded pride, central bank data showed that business and household deposits at Greek banks fell for a third month in March, bringing total losses in the first quarter to 10.6 billion euros. Moody’s Investors Service downgraded its credit ratings on nine Greek banks on Friday.

Platon Monokroussos, an economist at EFG Eurobank, the nation’s second-largest bank after the National Bank of Greece, said speculation that austerity measures would include new taxes on savings had caused some wealthy Greeks to move their funds to foreign banks and Cypriot units of Greek banks. But he said he expected the rescue package to calm fears and prevent a flight of funds.

Earlier in the week, the finance minister, George Papaconstantinou, told Mega TV that the Greek government had pledged to guarantee deposits at banks. But some businesspeople said the credit squeeze was growing worse.

Konstantinos Michalos, president of the Athens Chamber of Commerce and the owner of a company exporting latex products, said businesses were being deprived of much-needed liquidity.

He said his group’s members were complaining that some foreign banks were refusing to accept credit guarantees from Greek banks, citing the economic instability. As more Greeks in rural areas took their deposits out of banks and put their savings under their mattresses, he said, home burglaries were on the rise. Despite all the financial concerns, many Greeks insisted that fears of economic collapse were exaggerated.

Yiannis Batsos, 37, a lawyer, said he would not shift his money elsewhere in Europe. “If people take their money out of banks, this will only make things worse,” he said on a bustling street in central Athens, where dozens of Greeks sipped cappuccinos, seemingly unperturbed by the economic crisis. “We Greeks are not the only ones in Europe who are in this mess.”

Dan Bilefsky reported from Athens and Landon Thomas Jr. from London. Stelios Bouras contributed reporting from Athens, James Kanter from Brussels and John Vinocur from Berlin.