Greece announces new $6.5 billion austerity plan to pull country out of financial crisis

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Greece woos markets with $6.5B austerity plan

ATHENS, Greece — With creditors demanding solutions to the Greek debt crisis and the financial world increasingly on edge, Athens on Wednesday froze pensions, cut civil service salaries and slapped new taxes on everything from cigarettes and alcohol to fuel and precious gems.

Markets and the European Union reacted well to the €4.8 billion ($6.5 billion) austerity plan. But combustible Greek unions were outraged — and the country’s embattled premier, who had likened the situation to a “state of war,” is heading to Germany and France seeking more definite expressions of support.

Prime Minister George Papandreou warned that unless the new measures won EU and market backing and brought down the cost of borrowing for his country, Greece would turn to the International Monetary Fund. Such a move would be highly unpalatable to the 27-nation EU, highlighting the bloc’s inability to manage the crisis on its own.

“From today, the problem can’t be considered ‘Greek’. We are doing what we must and more,” Papandreou said during a closed-door Cabinet meeting, a speech that was released later. “So now, it is the time of Europe.”

If the EU and the markets don’t respond “as we would wish, because of speculative behavior, our last resort would be the International Monetary Fund,” he said.

Greece is already receiving technical help from the IMF, but has not yet appealed to them for a bailout. The IMF has bailed out EU members Hungary, Romania, and Latvia, as well as non-members Iceland, Ukraine, Belarus and Serbia — but never one of the 16 EU nations like Greece who share the common euro currency.

The IMF in Washington said it approved of the new plan, which is to be voted on Friday in Greece’s parliament.

“We welcome the substantial fiscal measures announced by Greek authorities today,” said Caroline Atkinson, the IMF’s director of external relations.

Papandreou said the new austerity measures, which add up to savings of €4.8 billion ($6.5 billion) or roughly 2 percent of Greece’s gross domestic product, were “not taken out of choice but out of necessity.”

Savings are split evenly between increasing revenue and slashing spending. Tax increases include a 20 percent hike for alcohol, a 65 percent increase on cigarettes and raising sales tax, or VAT, from 19 percent to 21 percent. Spending cuts include curbing civil servants’ pay, cutting bonuses and stipends, and freezing pensions.

“Today’s decisions reply to our country’s urgent need to stand on its feet … to cover the cost of servicing the public debt so our country does not collapse,” said government spokesman Giorgos Petalotis.

Greece shocked its EU partners in October when Papandreou’s newly elected Socialists sharply revised the budget deficit to a staggering 12.7 percent of gross domestic product in 2009, from earlier estimates of below 4 percent of GDP. The crisis has hammered the euro and made Greece’s cost of borrowing on the international markets skyrocket. It has also sparked market expectations of some sort of bailout led by Germany and France.

Athens has repeatedly said it wants EU help to borrow money at lower rates, but European officials have remained tightlipped over any potential rescue plan, insisting Athens must first improve its finances.

Papandreou heads to Berlin on Friday to meet with German Chancellor Angela Merkel — whose country is highly reluctant to indicate any form of concrete assistance. He is then off to Paris for talks with French President Nicolas Sarkozy before flying to Washington to meet President Barack Obama on March 9.

Greece has taken an “important step” toward realizing its goal of cutting its budget deficit, Merkel said in Berlin.

“This is a very important signal to strengthen markets’ confidence again in Greece and so also in the euro,” she said.

Merkel’s spokesman, Christoph Steegmans, stressed that Friday’s meeting won’t involve “pledges of help.”

Although the government had announced an austerity plan in January, it won only lukewarm support from its EU partners and didn’t calm jittery markets. But the latest batch of budget cuts did win early approval from the EU and leading credit ratings agencies Moody’s Investor Services and Fitch Ratings, both of which had downgraded Greece’s credit rating in December.

EU Economy Commissioner Olli Rehn described the new plan as a “potential turning point for Greece.”

“I can see that there is a very strong determination and unity to reform the country and put the public finances under control. This can be made a real turning point in the fiscal history and economic development of Greece,” he said.

EU Commission President Jose Manuel Barroso and the head of a group of eurozone finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, expressed confidence that Greece could now reduce its deficit by four percentage points this year.

Juncker repeated that eurozone governments “stand ready to take determined and coordinated action, if needed, to safeguard the financial stability in the euro area as a whole.” But governments have not said how they would bail out Greece if they have to.

Moody’s said the austerity measures were a “clear manifestation” of the government’s resolve and Greece should be allowed time to implement the measures.

“The onus is on the government to demonstrate that it does not merely announce ambitious plans, but is also able to deliver on these commitments,” said Sarah Carlson, senior analyst in Moody’s Sovereign Risk Group. “However, Moody’s does not expect Greek public finances to be turned around in a fortnight.”

Fitch Ratings said “politically challenging measures like a rise in VAT and further cuts in public sector pay indicate that the Greek authorities are indeed serious about cutting the deficit.”

Yet while the markets were happy, Greece’s labor unions certainly were not.

“These measures are terrible. I think the government does not realize how little people in this country are being paid,” said Despina Spanou of the civil servants union ADEDY. “This will throw the country into a deeper recession. We have no other choice other than to step up (our protests). We must protect our salaries and our lives.”

The union has already called its third 24-hour nationwide strike for March 16.

Smaller business owners also warned that the cutbacks would eat into their earnings, forcing closures and job losses. Greek unemployment already hit a five-year high of 10.6 percent in November.

“Obviously, we must expect a fall in consumer demand,” the Athens chamber of small and medium-sized industries said, adding that increasing unemployment will reduce “state tax revenues instead of boosting them.”

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Associated Press writers Derek Gatopoulos and Nicholas Paphitis in Athens, Aoife White in Brussels, Juergen Baetz and Matt Moore in Berlin, George Frey in Frankfurt, Jeannine Aversa in Washington and Pan Pylas in London contributed.