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Greek Prime Minister George Papandreou announced a raft of austerity measures Monday to rein in a soaring budget deficit in a bid to reassure Europe and investors that he was taking emergency action to rescue the country from the worst crisis in decades.
The announcement came as Greece's deficit stood at 12.7 per cent of the gross domestic product, and its debt is estimated at ?300 billion, or about $440 billion, more than 110 per cent of GDP.
It also came as Greek bond markets were thrown into disarray last week when Fitch Ratings downgraded its credit rating on fears that the country's soaring budget deficit and heavy debt might cause the country to default. Earlier in October, Moody's Investors Service put Greece on notice for a possible credit downgrade.
In his much-awaited speech to business and labor leaders, newly-elected Papandreou vowed to reduce state spending by 10 per cent and to bring the budget deficit to less than 3 per cent of GDP in 2013.
Noting that Greece faces the risk of sinking under its debt and that its biggest deficit is the deficit of credibility, the Prime Minister said markets want to see action, not words. He pledged that his new Socialist government, elected in October, would take steps over the next few months that are decades overdue.
"Greece, with so much potential, is in critical condition," Papandreou said.
Spending cuts announced include reduced military spending in 2011 and 2012, slashed public sector bonuses and 10 per cent less for both social security and the government's operating budget and salary caps for the directors of public utilities.
Papandreou also called for taxes of up to 90 per cent on large bonuses for private bankers, the closure of a third of Greece's tourist offices abroad and the elimination of cost-of-living increases for some public sector workers.
The newly-elected Socialist government will also introduce a new progressive tax scale, crack down on rampant tax evasion and cut bureaucracy to attract foreign investment. Also, it will introduce a capital gains tax and restore inheritance and property taxes, which the previous government had dispensed with.
Papandreou also called for reform of Greece's struggling pension system, which according to some estimates will be bankrupt within a year. He said starting in 2011, Greece would hire one new state worker for every five who retired. One in four Greeks works for the state, a result of decades of public-sector hiring to prevent social unrest.
Athens has been facing political pressure from the European Union (EU) to sort out its financial mess and stick to deficit limits intended to support the shared euro, whose credibility is as much at stake as that of Greece.
The Greek deficit is now projected at four times the three per cent limit imposed by the EU for euro currency countries. Athens has only met the EU-mandated deficit ceiling once since adopting the euro in 2001.
The EU is reluctant to bail out Greece as that would seem to rewarding a chronic violator of EU budget rules, and if they leave Greece to fend for itself, or to seek a bailout from the International Monetary Fund (IMF), that could spread the panic to Spain, Ireland and Portugal--all are suffering from extra scrutiny in the bond markets.
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