Greek Government Submits New Budget, Vows to Cut Deficit in Half

The new coalition government of Greece has presented its budget for next year -- with a vow to cut the deficit in half.

The budget, presented by new Prime Minister Lucas Papademos, must be passed by the parliament in order to allow Greece to keep receiving bailout money from the European Union (EU) and International Monetary Fund (IMF).

Evangelos Venizelos, the finance minister who survived the fall of the former government of Prime Minister George Papandreou, said the deficit will decline to 9 percent of GDP in 2011 to 5.4 percent next year, due to a write-off of debt owned by commercial banks. That relates directly to the 50 percent “haircut” allowed by the Eurozone rescue deal that was agreed to last month in Brussels.

Venizelos assured that banks would likely have various options over how to participate in the debt arrangements.

There won't be one model for Greek banks and foreign banks [alike], but there will be two or three variations and anybody can pick the one that suits them, he told reporters.

The budget also forecasts that Greece will actually deliver a primary surplus in 2012 of 1.1. percent (excluding interest payments).

Papademos’ government, which has said the recent EU rescue deal makes Greece’s national debt totally sustainable,” also promised that it will not have to enact any further austerity cuts.

We won't need to take any more measures that reduce citizens' incomes as long as we implement what we have already approved and which is already difficult, Venizelos told reporters.

The Greek public, particularly the trade unions, have already expressed their anger and outrage over a series of draconian measures, including job cuts, wage freezers and higher taxes. Unions have called for nationwide strikes while others have demonstrated on the streets.

Even if the budget can be implemented, Greeks face some dire days ahead. The economy is expected to contract by 5.5 percent this year (the fourth consecutive year of shrinkage) and by another 2.8 percent in 2012.

The feasibility of next year's fiscal deficit depends highly on the depth and severity of the recession, said Diego Iscaro, an economist at IHS Global Insight.

“Under current circumstances, we expect the economy to contract at a sharper rate in 2012 and therefore we believe that the target will be difficult to achieve.

Meanwhile, officials from the EU, IMF and the European Central Bank (ECB) have arrived in Athens and will meet with Papademos on Friday and Saturday.

Black clouds are swirling over the entire affair since the head of the opposition conservatives, Antonis Samaras of the New Democracy party, has refused to sign a pledge demanded by Eurozone officials that the new government adhere to austerity rules.

Samaras has also upset the Socialist PASOK party because he said he wants to win a clear majority in snap elections scheduled for February so he can scale back some of the austerity cuts he disagrees with.

Deputy Justice Minister George Petalotis, a senior PASOK party member, told state-controlled NET TV: As far as this government is concerned, Mr. Samaras is saying whatever suits him. All he has to say is that this is a transitional government, not a coalition government.