EU says Greece’s debt cuts are achievable, warns that it could ask for extra action

EU backs Greek plan to cut debt

BRUSSELS — The European Union tried to douse its government debt crisis Wednesday by backing Greece’s plan to shrink its massive deficits and warning it could demand Athens make even tougher cutbacks. But financial markets remained skeptical.

EU Economy Commissioner Joaqin Almunia called the Greek plan “achievable” and a European Commission report pressed Greece to tackle problems of competitiveness including high public and private sector wage levels.

Markets at first reacted positively with narrowing spreads on Greek government bonds showing that they were more confident that Greece can overcome its debt crisis and will not default on its borrowings.

However, spreads rose again in Wednesday afternoon trading on fears that striking Greek workers will hinder implementation of the plan.

A Greek default would be a serious blow to the EU’s monetary union, which requires members to keep finances under control. The crisis has also sparked speculation that Greece may need a bailout from other EU nations to pay its bills if it can’t make the cuts it is promising or borrow the money it needs from markets.

Greek and European officials say this won’t be necessary and deny reports that they are talking about a possible financial rescue package, which would be unprecedented for one of the 16 member countries of the eurozone.

Risk spreads for other eurozone nations with soaring deficits were also up, highlighting fears of crisis contagion on the troubled rim of the eurozone, with worries that Spain and Portugal could also have trouble getting debt under control. Portuguese spreads hit a 10-year high.

Almunia said Greece, Spain and Portugal had all seen a “permanent loss of competitiveness” since joining the euro, pointing to labor costs that are much higher than other euro nations.

Wages are one of the few levers eurozone governments have to make their economies more competitive because euro members cannot unilaterally devalue their shared currency or change interest rates to calm rising prices.

The EU warned Greece may still need to do far more to cut high public sector wages that has encouraged high pay across the economy and to reduce inflation that has been above the eurozone average for the last decade.

Civil servants are already angry with a government austerity program that freezes their pay and stalls recruitment. They are planning to strike Feb. 10 and customs and tax officials are set to walk off the job this week.

Greece is under immense pressure from markets and other EU governments to make cuts that would bring its budget deficit down from 12.7 percent of economic output last year to 2 percent in 2013.

Almunia said Greece “deserves support” but needs monitoring “so as to avoid slippages” and missing deficit reduction targets. Greece has agreed to report regularly to the EU on what it is doing, starting in mid-March.

He said Greece’s program “should be adopted as urgently as possible” to make sure it can meet its goal for 2010 “without doubts.”

“It is extremely challenging, it is absolutely necessary,” he said of the program.

Greece Prime Minister George Papandreou on Tuesday toughened his plan with higher fuel taxes, increased retirement ages and an overhaul of the tax system. These will be presented to the Greek parliament next week.

But the EU wants more, saying Greece needs to curb pension spending that is set to more than double to almost a quarter of gross domestic product in 2060. Health care also needs reforms, it says, because it has frequently caused the government budget to overrun.

Wider economic reforms to make Greece more competitive are also essential, it says. Greece lags behind other EU countries on liberalizing energy and transport — adding costs to businesses that are also burdened with hefty red tape.

Greece is the worst performing EU country in the World Bank’s business environment list which charts how easy it is to start and run a company. It also has rigid labor market rules that makes it hard for young people to get a job and protects older workers who already have one.

Greece’s debt crisis has alarmed bond markets and rocked the credibility of the European Union’s shared currency — causing the euro to slide against the U.S. dollar in recent weeks and Greece to pay higher spreads on borrowing as investors see more risk that it could default. The euro sank back below $1.40 to $1.3915.

The Greek stock market at first reacted positively to EU support for the Greek budget, with the Greece Composite Index up 1.42 percent in early afternoon trading, but then sank and traded down 1.46 percent

Yield spreads over the equivalent German government bond also initially narrowed to 3.346 percentage points Wednesday, before rising to 3.48 percentage points. They were about 3.50 percentage points late Tuesday, and have fallen in recent days as markets see less risk of a Greek default.

The EU is also calling on Greece to overhaul its statistics collection, following a sudden revision of its deficit last year — and an EU report that said Greece falsified its accounts to make the deficit look smaller.

“The statement from the Commission was in line with expectations but does very little to tackle the underlying issues or relieve the tensions,” said Ian Stannard, currency strategist at BNP Paribas. “

“Problems elsewhere on the periphery of the eurozone are coming to the fore, increasingly so, and the fact the market is turning to the others will intensify pressure on the euro,” Stannard said.

He expects an imminent fall in the euro towards $1.35 before falling even further.

“Increasingly the spotlight is falling on other countries and that’s been seen today. Before the markets dismissed Greece as an isolated issue, but if you include Spain, Portugal, Ireland and even Italy, then you suddenly account for 37 percent of eurozone GDP and that will obviously have an impact,” he said.

Associated Press writer Elena Becatoros in Athens contributed to this story.