Greece deficit cuts slowed by recession

October 3, 2011 - 7:35 AM

ATHENS, Greece (AP) — Greece's economy will remain in recession next year, with rising unemployment underscoring the difficulties the country faces in pulling its economy out of a debt crisis that has roiled markets around the world.

A day after it conceded it had missed its 2011 targets, Greece's debts are projected to reach 172.7 percent of gross domestic product in 2012. The deficit next year will drop to 6.8 percent, slightly above the 6.5 percent originally agreed with international bailout creditors.

The government said, however, that it will finally post a primary surplus — growth before interest payments on outstanding debts are taken into account — of euro3.2 billion, or 1.5 percent of GDP.

Greece relies on regular payouts from a euro110 billion ($150 billion) bailout from other eurozone countries and the International Monetary Fund, and was granted a second, euro109 billion bailout in July, although the details of the latter remain to be worked out.

Debt inspectors from the IMF, European Central Bank and European Commission, known as the troika, are in Athens reviewing reforms to see if Athens qualifies to receive the next euro8 billion installment of its bailout. Without it, Greece will run out of funds to pay salaries and pensions in mid-October.

The troika had suspended its review in early September over talk of missed targets and delayed implementation of reforms, and the government announced new austerity measures in the last few weeks, including pension cuts and extra taxes on property.

The 2012 draft budget "is within the framework which has been agreed with the troika and is supported by the package of measures which have already been decided on and announced" and which will be voted on by the end of the month in Parliament, Finance Minister Evangelos Venizelos said in a statement.

"The 2012 budget completes a dense and difficult effort of fiscal adjustment which, from a primary deficit of euro24 billion in 2009, reaches a primary surplus of euro3.2 billion in 2012," he said.

Next year's budget also covers a gap of 0.7 percent of GDP in this year's budget, which the government attributes to a recession that will see the economy contract by 5.5 percent this year and 2.5 percent next year. Unemployment is expected to reach 16.4 percent in 2012.

The deficit this year is expected to reach 8.5 percent of GDP, higher than the original target of 7.8 percent, the draft budget figures showed. Yet even this might increase by a further 0.5 percent of GDP if there is slippage in the implementation of austerity measures, the government said.

The deficit figure for 2011 "obviously depends on the stance of Greek citizens and society in general regarding the country's critical situation," the draft said. "Unless there is the necessary response to this national collaborative effort, based on the data from the budget execution so far, the deficit could increase by 0.5 percent of GDP."

Greeks have reacted with outrage to yet another round of austerity after already facing a year and a half of tax hikes and salary and pension cuts. Unions hold near daily demonstrations, and have declared a general strike for Oct. 19 and a civil servants' strike on Wednesday. Air traffic controllers are set to join Wednesday's strike, essentially grounding all flights.

Venizelos said the "most critical and important task" Greece had in order to return to growth "is to meet our fiscal and structural goals and to prove that we are determined, united and consistent."

Greece's Cabinet approved the draft budget on Sunday, with the finance ministry saying it wouldn't meet its initial deficit reduction targets for this year. The announcement Sunday night prompted widespread selling in stock markets Monday.

Part of the measures for next year are to place thousands of public sector employees on "reserve" — essentially suspending them on reduced pay. According to figures in the budget, this is expected to save about euro200 million.