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Papandreou Approves New Taxes, Cuts to Elude Greek Default

September 11, 2011

(See EXT4 <GO> for more on the sovereign-debt crisis.)

Sept. 11 (Bloomberg) -- Prime Minister George Papandreou, who vowed yesterday to avoid a default and keep Greece in the euro, approved new emergency measures to plug a yawning budget gap as resistance builds to extending more aid to the European Union’s most-indebted nation.

The Cabinet plans to cut one month’s wages from all elected officials and impose an annual charge on all property for two years, to be levied through electricity bills to ensure rapid collection, Finance Minister Evangelos Venizelos told reporters in the northern Greek city of Thessaloniki today.

The measures will help the country meet deficit targets of 17.1 billion euros ($23.6 billion) in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession, he said.

The latest round of cuts and taxes come after the euro slumped to a six-month low and the yield on Greek two-year notes surged to a record 57 percent on concern the country is sliding closer to default. Divisions among EU leaders threaten to scupper a second bailout plan approved in July, and German Finance Minister Wolfgang Schaeuble yesterday repeated a threat to withhold the next payment from the original rescue unless Greece shows it can meet fiscal targets agreed with the EU.

Papandreou said yesterday the government’s top priority is “to save the country from bankruptcy” and warned he would do whatever’s necessary to meet targets.

Tear Gas, Eggs

“We have made the decision to fight to avoid a catastrophe for our country and its citizens: bankruptcy,” he said in a speech in Thessaloniki. “We will remain in the euro, and this meant and means difficult decisions.”

Guests attending Papandreou’s speech were pelted with eggs as they ran a gauntlet of protesters to reach the venue. Police used teargas on demonstrators in Thessaloniki and in Athens, where Greeks marched against the austerity measures that have cut incomes and driven unemployment to a record.

A total of 4,500 police officers were deployed in Thessaloniki as 15,000 people protested, including students marching against education reforms and taxi drivers opposed to new licensing rules. Police detained 94 and arrested two.

The government now expects the economy to shrink 5 percent this year, worse than the June estimate of 3.8 percent from the EU and International Monetary Fund, and a deeper contraction than in the past two years. The forecast damps hopes that Greece will meet its pledge to lower its budget deficit to 7.5 percent of gross domestic product in 2011, with the government blaming the slump for a budget gap that widened 25 percent in the first seven months of the year.

‘Hellish’ Months Ahead

Venizelos, who on Sept. 6 promised to speed austerity measures pledged in return for the emergency loans, said today the situation was “critical” and that the next two months would be “hellish.”

The government must draft a credible 2012 budget, proceed with state asset sales and complete a voluntary debt swap by the end of October while EU leaders work on the final touches to the European Financial Stability Facility, he said.

Speculation of a Greek default is aimed at the euro and it must be countered if the region is to stop the spread of the debt crisis, Venizelos said yesterday.

Lack of Institutions

Today he said the lack of institutions in the euro area underpinned the volatility in global markets in recent days.

“Greece is too small to be a catalyst for the future of the euro area,” he said. “It accounts for 2 percent of the GDP of the euro area and less than 3 percent of the area’s debt. We can’t let our country become a pretext for divisions that aren’t about us.”

European leaders came in for criticism for their handling of the region’s debt crisis at a meeting of Group of Seven finance ministers in Marseille, France, that ended yesterday.

“They’re moving, but I think they’re going to have to demonstrate to the world they have enough political will,” U.S. Treasury Secretary Timothy F. Geithner said in a Bloomberg Television interview from Marseille, where he attended the G-7. “This is not a question of financial or economic capacity.”

Canadian Finance Minister Jim Flaherty said Sept. 9 Greece may have to leave the euro if it fails to press ahead with its budget-cutting plans. The comments echoed remarks by Dutch Prime Minister Mark Rutte this week that countries breaking the region’s budget rules should face expulsion.

Germany’s Schaeuble reiterated that Greece must fulfill the conditions laid down in its adjustment program to get the next tranche of international aid due this month.

“There can be no doubt” that the two are linked, Schaeuble told reporters in Marseille. “Everybody must stand by the agreements.”

German Banks

Germany is preparing a plan to shore up the nation’s banks in the event that Greece fails to meet the terms of its aid package and misses a payment on its debt, three members of Chancellor Angela Merkel’s coalition said Sept. 9.

Fears have deepened since a scheduled quarterly review of Greece’s progress by the EU and IMF was unexpectedly suspended for 10 days last week. The cost of insuring Greek debt against default jumped 212 basis points Sept. 9 to a record 3,238, according to CMA. The five-year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments.

Mostly Dissatisfied

Greece’s economy shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Athens-based Hellenic Statistical Authority said in an e-mailed statement on Sept. 8. The figure, based on constant prices and available non-seasonally adjusted data, is higher than an Aug. 12 preliminary estimate for a 6.9 percent contraction. A seasonally adjusted figure wasn’t provided.

Nine in 10 Greeks are dissatisfied with the government and opposition’s handling of the crisis, according to a poll of 1,216 Greeks by researcher Public Issue published in Kathimerini newspaper today.

Opposition New Democracy party’s lead over the governing Pasok party is now four percentage points, with the poll showing neither party would win an outright majority in parliament if elections were held now. The poll was conducted Sept. 2 to Sept. 7 and the margin of error is 2.9 percentage points.

--With assistance from Rainer Buergin in Berlin, Ian Katz and Peter Cook in Washington, Theophilos Argitis in Ottawa , Tom Stoukas in Toronto, Maria Petrakis and Christos Ziotis in Athens and James Hertling in Paris. Editors: Maria Petrakis, Alex Devine

To contact the reporters on this story: Natalie Weeks in Athens at; Eleni Chrepa in Athens at

To contact the editor responsible for this story: Angela Cullen at

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