Greece: Greece approves austerity measures, unblocking the final tranche of current bailout package
July 2, 2011
On 29 June, the Greek parliament passed a crucial five-year austerity plan, which establishes an additional EUR 28.4 billion (USD 41.0 billion) in spending cuts and new taxes in order to meet requirements to disburse the fifth and final tranche of EUR 12 billion from the current EUR 110 billion EU-IMF bailout package. The measure was approved by a vote of 155 in favour to 136 against, amid violent clashes outside parliament. The new five-year austerity plan will comprise an increase in social contributions and taxes, including EUR 1.4 billion from a so-called solidarity levy for this year, which will range between 1% and 5% of households' income. On the expenditure side, the government will cut public sector wages, social benefits and the defence budget. In addition, some public entities will be closed or merged, while some others will be privatized. Finally, the government pledged to fight against tax evasion. According to estimates from the labour ministry, a quarter of the economy pays no taxes. The announced measures pave the way for a new bailout package, which could exceed EUR 100 billion (USD 146 billion). Led by France, European politicians had tried to get the private sector involved in a Greek rescue plan through a voluntary rollover of maturing debt without triggering a downgrade to default level by the rating agencies. French and German banks, key holders of Greek bonds, had signalled their willingness to participate in the new financial aid program under certain conditions and assurances. In a joint statement from 2 July, Eurozone ministers said ?consultations with Greece's creditors are underway in order to define the modalities for voluntary private-sector involvement with a view to achieving a substantial reduction in Greece's year-by-year financing needs, while avoiding selective default.? However, on 4 July, rating agency Standard and Poor's dashed hopes to end the Greek debt crisis at least temporarily by saying that the French proposal would likely put Greece in ?selective default?. Classifying Greek bonds as being in selective default would collide with the European Central Bank that has repeatedly warned it would not accept defaulted bonds as collateral for its lending operations. The government and the troika expect that with the new measures, the fiscal deficit will moderate to 7.4% of GDP in 2011.