Greek leaders reach deal on $14.14 billion spending cuts

Greek political leaders on Wednesday agreed to 1.5 billion euros ($14.14 billion) of new spending cuts, demanded by the debt-crippled country's bailout creditors, opening the way for a deal with foreign lenders within the month.

Updated: Aug 02, 2012, 09:16 AM IST

Zeebiz Bureau

Athens: Greek political leaders on Wednesday agreed to 1.5 billion euros ($14.14 billion) of new spending cuts, demanded by the debt-crippled country's bailout creditors, opening the way for a deal with foreign lenders within the month.

With 3.2 billion euros worth of bond payments due in August, the clock is ticking for Greece to please visiting troika inspectors who will rule on whether Athens gets more cash from its 130-billion-euro bailout.

Without the €11.5 billion ($14.14 billion) package of cuts for 2013 and 2014, Athens would lose access to the international loan program that is protecting it from bankruptcy.

"The prime minister said that it must be accepted — as a necessary condition for our country to remain in the eurozone and to be able to negotiate further — to further cut public spending by €11.5 billion," Finance Minister Yannis Stournaras said. "That position was accepted."

He said negotiations with creditors would start now and announcements will be made toward the end of August on the full details of the cutbacks — which Greek officials say will include new reductions in pensions and benefits.

"The basic aim is to minimize the effect on society," Stournaras added. He said Greece would also try to secure an extension in its two-year austerity deadline, a key pledge of all three coalition partners.

Socialist PASOK leader Evangelos Venizelos told reporters he backed down from demands for some of the cuts to be delayed to avoid bringing down the six-week-old government and forcing new elections.

"If the prime minister believes that the immediate adoption of all the €11.5 billion measures will then allow him to negotiate (with creditors) and that only that will secure payment of the next loan installments and the country's position in the euro, I am obliged to accept his estimate," Venizelos said. "We will not lead the country to elections."

But Venizelos insisted that the new cutbacks should not involve "unfair, across the board measures."

Venizelos spoke after two-hour talks with Samaras, a conservative, and Fotis Kouvelis, head of the moderate Democratic Left party. It was their third meeting in less than a week.

International bailout creditors are closely scrutinizing the country's lagging austerity and reform program, and a negative report next month would likely lead to the vital rescue loans being halted. That would leave the government unable to pay pensions, salaries and service its debts, which in turn could force Greece to leave the 17-member eurozone, unleashing a global market tsunami.

Samaras' uneasy coalition — the conservatives and the Socialists have been bitter rivals for the past four decades — was formed to end a political impasse after two inconclusive general elections. The dispute over the cutbacks was its first major test of cohesion, with PASOK arguing ahead of Wednesday's meeting that the program would not work without major changes.

The Socialists had wanted to split the cuts and reforms into two stages and over a longer time period to avoid deepening a brutal recession, which is expected to reach a cumulative 20 percent since 2008. Greece's worst post-World War II crisis has seen unemployment reach a record high of nearly 23 percent, while thousands of skilled professionals have left to seek jobs abroad.

Greece has been relying on rescue loans from other eurozone countries and the International Monetary Fund since high interest rates pushed it out of bond markets in 2010. In return, it imposed harsh austerity, slashing pensions and salaries, repeatedly hiking taxes and increasing the retirement age.

Debt monitors from the International Monetary Fund, European Central Bank and European Union — known as the troika — are currently in Athens for an inspection, and are pressing the new government to make up for past delays in long-term structural reforms aimed at reducing the size of the public sector.

They will meet Stournaras on Thursday.

Analyst Martin Koehring, from the Economist Intelligence Unit, said the delays in identifying the new cutbacks are "not surprising, given the social and economic damage that the fiscal austerity program has already done."

"The center-right New Democracy party will find it increasingly difficult to continue backing the austerity agenda without risking a collapse of the fragile coalition," he said, adding that new elections would probably bring the opposition radical left Syriza party to power, which could take Greece out of the eurozone.

"On balance, however, the troika of international lenders will try to help Greece find the necessary cuts in the next couple of weeks to ensure that Greece gets the next bailout tranche in September," he said. "The eurozone is currently not prepared for a Greek euro exit, and neither the new Greek government nor Greece's international lenders are willing to risk a Greek exit over the latest austerity plans. This makes an eventual compromise likely in August."

With Agency Inputs