Eurozone crisis rolls on; Greece expand top tax bracket in urgent deficit-cutting drive

Greece readies tax change to fight crisis

ATHENS, Greece — Hopes that that Greece won’t be allowed to default on its crushing debt load weighed against fears the country’s crisis would spread through the 16-country euro zone, as the government worked Monday on a tax overhaul aimed at getting its deficit under control.

Finance Minister George Papaconstantinou says a new tax bill to be presented this week will expand the top 40 percent tax bracket to incomes below the current euro75,000 ($102,000) threshold.

In an interview in Ta Nea newspaper, Papaconstantinou also insisted that middle- and low-income earners would pay less tax. Papaconstantinou hopes to raise nearly euro4 billion in extra taxes this year, and an additional euro1.2 billion from a crackdown on tax evasion.

European stocks rebounded Monday, a sign that some think the government debt crisis that has shaken up European Union leaders may have been overdone. The reasoning is that a default would be such a serious blow to the euro currency that the EU would organize a rescue, although EU and Greek officials insist none will be necessary.

“A solution for Greece will be found, either from within the country or from the wider eurozone,” said Daragh Maher, analyst at Calyon. “On a number of fronts the pessimism looks overdone, notably in relation to the performance of the global economy.”

But the main Greek stock index was down more than 3.5 percent in midday trading, while Greek government bonds were trading around 350 basis points above the benchmark German issues of the same maturity, about the same as last week.

The Greek problems have wider significance because market fears could spread to other deficit plagued euro area countries such as Portugal, Spain, Ireland or Italy.

Greece’s budget deficit reached 12.7 percent of annual economic output last year — four times over the EU limit — while the national debt was more than 113 percent of GDP. This alarmed Greece’s European Union partners and international markets, forcing a spike in borrowing costs for Greece and other weak European economies and pushing down the euro exchange rate.

The Greek crisis highlights one of the vulnerabilities of the euro currency. It has one central bank — the European Central Bank — to set interest rates, but has no central fiscal authority.

Instead, the monetary union depends on all 16 governments following rules to keep their deficits within a limit of 3 percent of gross domestic product each year — and those limits have been breached during the world economic turbulence of the last three years.

EU officials have put intense pressure on Greece to get back within the limits. The government says it will do so by 2012, but markets remain skeptical that it can force through such extreme cuts, which could be highly unpopular.

While freezing public sector wages and cutting some bonuses, the government has fought shy of further salary cuts or layoffs in the civil service, which employs some 750,000 people — all who are guaranteed lifetime jobs.

European finance officials tried to reassure markets over the weekend with statements at the weekend meeting of finance officials from the Group of Seven leading industrialized countries in Iqaluit, Canada.

Speaking in Iqaluit Sunday, European Central Bank governor Jean-Claude Trichet offered renewed support for Greece’s deficit-busting program, which he said the ECB would closely monitor.

“Now we expect and are confident that that the Greek government will take all the decisions that will permit it to reach that goal,” he added.

British Treasury chief Alistair Darling said Greece’s austerity plan was in the common European interest.

“The best reassurance that you can give to anyone is that countries individually do what they need to do to achieve their plans, but that we understand that collectively, it’s in all our interests that countries return to good economic health as early as they potentially can.”

One concern is whether governments in Greece and Portugal can push through unpopular austerity measures.

A newspaper poll Sunday found that most Greeks back Prime Minister George Papandreou’s public sector spending cuts — which are expected to save close to euro2 billion ($2.74 billion). But the majority of respondents also opposed a hike in the fuel tax and the introduction of new taxes.

A first tangible indication of social reaction to the austerity plan will come on Wednesday, when civil servants, who face a salary freeze and bonus cuts, have called a nationwide strike. Greece’s umbrella private sector union is planning a separate 24-hour walkout Feb. 24.

Further union anger is expected over a planned overhaul to Greece’s profligate social security system, which will involve an increase in retirement ages and will be announced later this week.

Associated Press Writers Carlo Piovano in London and Jane Wardell in Iqaluit, Canada, contributed to this story