Greece pressed to shrink state and avoid default

International lenders told Greece on Monday it must shrink its public sector to avoid running out of money within weeks, as investors spooked by political setbacks in Europe dumped risky eurozone assets.

Adding to concerns, Standard & Poor’s cut its ratings on Italy in a major surprise that threatened to stoke fears of contagion in the debt-stressed eurozone.

Greece is near a deal to continue receiving bailout funds, a Greek finance ministry official said after a conference call with lenders, though “some work still needs to be done”.

US stocks recovered some of their losses on the news.

Greece Finance Minister Evangelos Venizelos held what Greece termed “productive and substantive” talks by telephone with senior officials of the European Union and International Monetary Fund after promising as much austerity as necessary to win a vital next instalment of aid.

The talks will resume on Tuesday evening after experts meet through the day. Earlier, the International Monetary Fund’s (IMF) representative in Greece spelled out steps Athens must take to secure the €8-billion loan it needs to pay salaries and pensions next month.

“The ball is in the Greek court. Implementation is of the essence,” Bob Traa told an economic conference.

Eurozone membership
Additional savings measures were required to cut the public deficit to a sustainable level and reduce the public sector’s claim on resources — code for axing jobs and cutting pay and pensions — while improving tax collection rather than adding further taxes, Traa said.

Venizelos said Greece would do what was needed to get more funds but would not be made a scapegoat by eurozone policymakers who had failed to tackle the region’s debt woes.

Greek Prime Minister George Papandreou is considering calling a referendum on eurozone membership as a ways to strengthen the government’s hand in dealing with the debt crisis as pressure mounts from all sides, the Kathimerini English language newspaper reported on its website.

A Bill to be submitted in Parliament, paving the way for such a vote, is to be discussed in coming days, the newspaper added.

European stocks and the euro fell sharply on fears of a Greek default, compounded by the failure of European Union (EU) finance ministers to agree new steps to resolve Europe’s debt crisis at weekend talks, and another regional election defeat for German Chancellor Angela Merkel.

The euro fell about 0.5% in early Asian trade on Tuesday after S&P cut its rating on Italy, citing weakening economic growth prospects and a fragile ruling coalition.

‘Concerted action’
In a sign of mounting stress, yields on Italian and Spanish bonds rose further above 5% despite six weeks of European Central Bank buying to stabilise them. The cost of insuring peripheral debt against default also rose.

“There will be additional volatility in the global financial markets heading into the end of the month as the pressure to get Greece and others to enact their reforms will be white-hot intense,” said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago.

The eurozone debt crisis is now dominating the thoughts of policymakers worldwide with the United States, in particular, pushing for more dramatic action from Europe’s leaders.

US President Barack Obama and Germany’s Merkel spoke by telephone on Monday — the latest of several calls between the two leaders — and agreed that “concerted action” would be needed in the coming months to address it.

Emerging economies are also worried about being hurt by a deepening of the crisis in Europe.

A Brazilian official said Brazil will propose this week that it and other large emerging economies make new funds available to the IMF to help ease the crisis in the eurozone.

“A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries’ investment and a pull back by their consumers too,” World Bank chief Robert Zoellick said ahead of Group of 20 talks and an IMF/World Bank meeting in Washington later in the week.

Austerity measures
Without its next loan tranche, Athens says it will run out of cash in mid-October.

A default would threaten contagion to larger eurozone economies such as Italy and hammer European banks with heavy exposure to Greece.

Prime Minister Papandreou cancelled a planned trip to Washington and the United Nations at the last minute and returned home in response to the crisis.

A senior Greek government official said the EU/IMF inspectors expect a new property tax unveiled last week to yield just half the €2-billion targeted this year.

Greek media published a list of 15 austerity measures it said the troika was demanding the Socialist government implement to receive the next tranche of aid.

They included firing another 20 000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down loss-making state organisations, cutting health spending and speeding up privatizations.

The European Commission said it was not asking Athens to adopt any additional austerity steps on top of what had already been agreed in the Greek reform program.

Public support lacking
The IMF’s Traa acknowledged that the IMF/EU bailout plan lacked public support and said there was plenty of goodwill to give Greece more time for its adjustment program in a weaker-than-expected economy.

He said the economy was set to contract by 5.5% this year and 2.5% in 2012.

Asked whether Greece would get the next loan tranche, Finance Minister Venizelos said: “Yes, of course.”

Even if it does, many economists and investors believe Athens will default on its debt mountain — more than 150% of gross national product — perhaps within months.

Former IMF chief Dominique Strauss-Kahn joined the chorus on Sunday, saying Greece’s debt must be cut and government and private creditors should take losses now. “[EU] governments are not solving things, they are kicking the problem down the road, and the snowball is growing,” he told French television.

‘Grudging incrementalism’
Uncertainty over Greece was compounded by another political shock in Germany at the weekend.

The sixth regional election defeat this year for Merkel’s centre-right coalition on Sunday raised questions about the stability of her government and her ability to push through more eurozone rescue measures.

Her Free Democratic (FDR) junior coalition partners crashed out of Berlin’s regional assembly with 1.8% of the vote, raising pressure from some party activists for a more Eurosceptical line.

Leaders of both the Bavarian Christian Social Union (CSU) and the FDR have raised the prospect of Greece defaulting and possibly having to leave the 17-nation single currency area, ignoring rebukes from the chancellor for alarming markets.

Merkel said on Monday it would send a disastrous political message if eurozone members could be thrown out of the bloc because they faced difficulties. Instead, she advocated tougher rules to force euro states to obey budget discipline.

German lawmakers are due to vote on September 29 on reforms agreed by eurozone leaders in July to allow the European Financial Stability Facility to buy government bonds in the secondary market, give states precautionary loans and lend to recapitalise banks.

Merkel insisted she would win the vote.

In another illustration of the pressures on her, German central bank chief Jens Weidmann told Parliament that planned measures to beef up the eurozone’s rescue fund would not encourage countries to put their budgets in order.

Last week US treasury secretary Timothy Geithner pressed eurozone finance ministers apparently in vain to take stronger action to stop the sovereign debt crisis spreading.

One of his predecessors, Lawrence Summers, said in a Reuters column that all nations should pressure Europe to go beyond “grudging incrementalism” to recapitalise banks, and revive economic growth. — Reuters

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

Tax the super rich and raise inflation to cut state debt, inequality and poverty

The richest 10% of South Africans own over 85% of all private wealth and a once-off 25% tax would reduce government debt by more than half. Imagine what a five-year wealth tax could do

George’s holiday in Greece with Madiba

In his book 65 Years of Friendship: A memoir of my friendship with Nelson Mandela, George Bizos tells of their only holiday together

Unpacking the myths and misunderstandings in the Covid-19 vacuum

The basics of epidemiology will help explain why some of the believable but incorrect propositions about the pandemic are wrong.

Elnathan John: Finding the balance of things in strange, new places

Like flotsam you float from one unknown place to another, to seek and establish equilibrium — only to have it all disrupted by a pandemic

Covid-19: Free the evidence

Governments need to provide the modelling and data informing the strategy to control the spread of the novel coronavirus

World Cup review, Part V: Spain and the lasting legacy of 2010

South Africa had a front row seat as the greatest team of its generation went into full bloom

Subscribers only

FNB dragged into bribery claims

Allegations of bribery against the bank’s chief executive, Jacques Celliers, thrown up in a separate court case

Dozens of birds and bats perish in extreme heat in...

In a single day, temperatures in northern KwaZulu-Natal climbed to a lethal 45°C, causing a mass die-off of birds and bats

More top stories

North West premier goes off the rails

Supra Mahumapelo ally Job Mokgoro’s defiance of party orders exposes further rifts in the ANC

Construction sites are a ‘death trap’

Four children died at Pretoria sites in just two weeks, but companies deny they’re to blame

Why the Big Fish escape the justice net

The small fish get caught. Jails are used to control the poor and disorderly and deflect attention from the crimes of the rich and powerful.

Koko claims bias before Zondo commission

In a lawyer’s letter, the former Eskom chief executive says the commission is not being fair to him

press releases

Loading latest Press Releases…