Greece for sharper deficit cut in 2012

Greece for sharper deficit cut in 2012

Greek Prime Minister Lucas Papademos (left) with Bank of Greece governor George Provopoulos in Athens. AP

Submitting the 2012 budget, Finance Minister Evangelos Venizelos said the deficit will shrink from an expected 9 per cent of gross domestic product this year to 5.4 per cent in 2012 year, lower than previous targets.

Next year’s figure factors in writedowns on the value of Greek bonds held by private creditors as part of a second international bailout agreed by European leaders last month.

Without it, the deficit would have shrunk to 6.7 per cent of GDP next year, according to budget calculations. The new bailout was negotiated to save Greece from bankruptcy and a possible exit from the euro.

“This budget comes during extremely hard international conditions. The attack is now focusing on the hard core of the euro zone,” the minister said, referring to rising borrowing rates in larger countries like Italy.

Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country’s national debt “totally sustainable”.

The deal includes provisions for banks and other private holders of Greek bonds to write off 50 per cent of their Greek debt holdings potentially cutting the country’s debt by Euro 100 billion and reducing the debt-to-GDP ratio to 120 per cent by 2020 from an expected 161.7 per cent this year.

But the details have not yet been worked out, and negotiations have only just begun. Greece has been relying on international bailout loans since May 2010 after its borrowing rates ballooned.

The country turned to its European partners and the International Monetary Fund, winning an initial $148 billion bailout in return for an austerity package to cut deficits bloated by years of government overspending.

It soon became clear that the rescue loans were not enough, and European leaders agreed on a second deal as part of a package to shore up a debt crisis that’s been spreading to bigger economies, such as Italy.