On Monday, Greece Prime Minister George Papandreou’s administration signed on to a broad €6.6 billion euro ($8.8 billion U.S. dollars) austerity plan in an effort to win over a sixth round of financial bailout to rescue the country from its sovereign debt problems. The loan package would be the second authored by the European Union.
The austerity package would mean the 2012 Greece government budget deficit would come in at 6.8 percent of the projected gross domestic product, which is not quite as stringent as the 6.5 percent aim that was outlined in earlier weeks by the European Union, International Monetary Fund and European Central Bank, also known as the troika. Although the plan is slightly off the goals previously set, troika inspectors have also approved to the proposed Greek budget for 2012.
The euro has recently plunged to a low versus the U.S. dollar not seen since the beginning of the year as European policy makers met Monday to consider additional powers for the European Financial Stability Facility, or EFSF. One option being widely considered is to have the fund purchase bonds and use those bonds as collateral to secure further liquidity from the European Central Bank. Troika inspectors have been pushing Greek Prime Minister Papandreou to enact deeper spending cuts as the country struggles to contain its crisis and as investors worry about sovereign debt issues hitting fellow EU nations such as France, Portugal, Ireland and others.
Papandreou met with his ministers on Sunday and stated, “Important decisions which need to be taken on a European level depend first and foremost on us. We need to show our dedication to reaching the goals.”
Parliament Approval Required
The austerity measures, which were created with the goal of securing the disbursement of an 8 billion euro loan payout in October, will require parliamentary approval in order to be enacted. There is also a second bailout loan of 109 billion euros that EU leaders agreed to in July at stake.
In trading early Monday the euro dropped 0.5 percent to $1.33 and stocks fell overseas as the MSCI Asia Pacific Index fell 2.9 percent. The Greek economy is now projected to decline 5.5 percent overall for 2011, which is a significant difference from the 3.8 percent decline forecast by the European Union and IMF back in June.
Officials from around the world, including U.S. Treasury Secretary Timothy Geithner and German Chancellor Angela Merkel have urged European policy makers to step up their efforts to end the current crisis facing Europe. Eurozone finance ministers met on Monday in Luxembourg with Papandreou’s cabinet to discuss ways to fix the issues facing Greece and keep them from spreading throughout the EU.
Added Powers to the EFSF
On Monday, Bank of France Governor Christian Noyer announced he was open to the notion of using borrowed funds to add powers to the European Financial Stability Facility; a fund set up two years ago to rescue European nations in case of a financial crisis. In a speech in Tokyo, Noyer said, “It would be unrealistic to expect an increase in the EFSF itself. But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”
The austerity package was approved by the Greek cabinet late Sunday along with the 2012 budget and the plan to dismiss state employees. The Greek government is scheduled to single out 30,000 state employees in December who will be placed on a reduced pay package, be asked to retire early or simply let go. Finance officials have estimated the move would save $300 million from government expenses in 2012.