Bloomberg News

Greece Should Cut Spending on Defense, Health, Troika Says

January 29, 2012

(Adds government spokesman in seventh paragraph, pensions in 10th paragraph. See EXT4 for more on the debt crisis.)

Jan. 27 (Bloomberg) -- Greece should focus exclusively on spending reductions to meet 2012 deficit-cutting conditions of a second bailout package, the country’s international creditors said in a report to the government.

The report, dated Jan. 23, put the military, health care and state-run companies at the center of austerity measures amounting to about 1 percent of gross domestic product, which was about 217 billion euros ($285 billion) last year.

Representatives of the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika, prepared the recommendations amid concern that the interim government of Lucas Papademos is falling short of expectations in controlling its budget.

“We’re not terribly positive about what has been done but we want to put together a program for the country,” IMF Managing Director Christine Lagarde said in an interview today with Bloomberg Television in Davos, Switzerland.

Papademos came into office in November charged with securing a 130 billion-euro financing package set at an October summit of European Union leaders, Greece’s second in less than two years, and negotiating a debt swap with private creditors that will lop 100 billion euros off the country’s 350 billion- euro debt load.

‘New Program’

The “document addresses suggested refinements to possibly be incorporated into a new program,” said the report, which was posted on Capital.gr news website. “The list at this stage reflects the analysis of the staffs of the EC, ECB and IMF and is expected to be refined as the Greek authorities present their own suggestions.”

The report is a draft for discussion, and not the final version of the measures Greece must adopt, government spokesman Pantelis Kapsis said in an interview on Skai TV, according to an e-mailed transcript of his comments from his office.

Greece needs to implement reforms agreed after previous rounds of talks with the troika and introduce structural economic reforms including to the labor market and tax administration, the report said. The state should “offer two to three large companies for privatization” in the second quarter to be consistent with asset-sales targets.

The report also suggested Greece should recapitalize its banks using instruments without voting rights. Banks should have a core tier 1 capital ratio of 10 percent from 2013. This year the banks’ core tier 1 requirement would be 9 percent.

‘Big-Ticket Items’

The 2012 measures should “be achieved on the expenditure side only and should be a few big-ticket items,” said the report. Cuts in health spending would focus on reducing pharmaceutical costs. The country should also adopt legislation to consolidate its state-run supplementary pension funds into a single fund, the report said.

Greece’s 2012 budget, approved by parliament in December, forecast spending of 4.9 billion euros by the Ministry of Health and 4.2 billion euros spending by the Ministry of Defense, including 1 billion euros on procurement.

In the electricity sector, the report recommends Greece “combine the sale of lignite with hydro plants owned by the incumbent electricity company,” Public Power Corp. SA, “to create competition in the generation side of the market.”

--With assistance from Paul Tugwell, Christos Ziotis and Maria Petrakis in Athens. Editors: James Hertling, Eddie Buckle

To contact the reporter on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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