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(Updates with Rehn in sixth paragraph, debt levels in 11th. Click on EXT4 for more on Europe’s debt crisis.)
Oct. 3 (Bloomberg) -- The Greek government said it passed a new budget backed by its international creditors, including larger deficits than previously forecast, as the country moves closer to securing an 8 billion-euro ($10.7 billion) aid payout needed to avoid default.
Prime Minister George Papandreou’s Cabinet also passed 6.6 billion euros of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the European Union, International Monetary Fund and European Central Bank, known as the troika. Finance Minister Evangelos Venizelos previously said Greece would miss the targets.
The new deficit numbers “should not derail Greece’s current negotiations with the troika,” Geoffrey Yu, a currency strategist at UBS AG in London, wrote in a note to clients. “We remain of the view that Greece will ultimately receive its current bailout tranche.”
Greek bonds fell before European finance ministers gather today to consider enhancement’s to the region’s rescue fund. Papandreou adopted the austerity measures under pressure from the troika as the country’s three-year recession sapped the revenue needed to close the fiscal gap. Euro-region finance chiefs will meet again on Oct. 13 to decide whether the austerity push is enough to win the sixth bailout payment.
The yield on Greece’s 10-year bond rose 6 basis points to 22.74 percent and the two-year yield gained 10 basis points to 62.27 percent. The euro fell 0.5 percent to an eight-month low of $1.3322 as of 1:30 p.m. in London.
European Union Economic and Monetary Affairs Commissioner Olli Rehn praised the austerity measures and new budget, while saying it’s too early to know whether they are sufficient to free up the aid money.
“Greece has taken important decisions in the past weeks, also including yesterday,” Rehn told reporters today in Luxembourg before the meeting of euro-area finance ministers. “We are currently assessing whether Greece will meet its fiscal targets with the current measures.”
Greece’s measures, which still require parliamentary approval, aim to secure disbursement of the 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21.
“The delays in the completion of this review and the delay in the disbursement of the sixth tranche leaves the cash position of the Greek treasury under severe strain,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London wrote in a note to clients. “It is likely that the Treasury will have to issue some Treasury bills and prioritize government expenditure until they receive the sixth disbursement.”
Under the budget passed yesterday, the deficit this year would be 8.5 percent of GDP, more than twice the EU’s 3 percent limit, and more than the 7.6 percent target previously agreed with the troika.
In nominal terms, next year’s gap is seen at 14.7 billion euros, less than the 14.9 billion-euro target under the previous pledge. The budget foresees a primary surplus of 3.2 billion euros next year, or 1.5 percent of GDP, according to the statement. The Finance Ministry said in a statement last night that the budget plan was “agreed with the troika.”
Greece’s economy will shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF in June, according to the statement. Greece’s debt, currently the largest in the history of the euro, will rise to 161.8 percent of GDP this year and 172.7 percent in 2012, according to the budget plan.
European finance ministers in Luxembourg will be trying to advance plans to increase the powers of the region’s rescue to be able to protect other countries such as Italy and Spain from the debt crisis contagion. Finance ministers are being urged to seek ways to increase the firepower of the 440 billion-euro mechanism.
Bank of France Governor Christian Noyer today said he’s “open” to the idea of using borrowed money to enhance the capabilities of the fund known as the European Financial Stability Facility, which is also due to finance the second Greek bailout.
“It would be unrealistic to expect an increase in the EFSF itself,” Noyer said in a speech in Tokyo. “But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”
The meeting was originally due to coincide with the payout of the sixth installment of Greece’s original rescue. The payment had been put off until later in October as the troika gave Papandreou more time to close the deficit gap. Papandreou announced last night that a special meeting of euro-region finance ministers would take place on Oct. 13 to hear the results of the troika’s review.
The austerity measures were detailed after the cabinet meeting last night, which also approved the 2012 budget and a plan to allow for dismissal of state workers. The government by December will identify 30,000 public workers who will be put on reduced pay and either retire early or eventually be fired. The plan aims to save 300 million euros from the government wage bill in 2012.
“For the first time since the foundation of the Greek state and after a century of struggle, the permanency of civil servants is being abolished in the most inhuman, unconstitutional and illegal manner,” said Athens-based ADEDY, which represents about 750,000 state workers and has called a strike for Oct. 5. The government has decided “to offer up state workers as prey to the country’s creditors.”
--With assistance from Natalie Weeks in Athens and Aki Ito in Tokyo. Editors: Andrew Davis, Fergal O’Brien
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