Greece Faces `Unprecedented' Cuts as $159B Rescue Nears

Greece accepted an unprecedented bailout from the European Union and International Monetary Fund valued at more than 100 billion euros ($133 billion) to prevent default, agreeing to budget cuts that unions called “savage.”, Bloomberg 5/2/2010 11:35:06 AM

The measures are worth 30 billion euros, or 13 percent of gross domestic product, and include wage cuts and a three-year freeze on pensions, Finance Minister George Papaconstantinou said in Athens today. Greece’s main sales tax rate will rise to 23 percent from 21 percent. The exact bailout amount will be agreed by euro-region finance ministers currently meeting in Brussels. Germany will provide 28 percent of the euro region contribution.

Policy makers are trying to prevent a Greek default as its fiscal crisis shows signs of spreading through the euro region. The agreement, following 10 days of talks and protests, comes after a surge in Greek borrowing costs left the government struggling to finance its debt and investors speculating that Portugal and Spain could also suffer their fate.

Euro region ministers started their meeting at 4 p.m. and will later hold a press conference, which will also be attended by European Central Bank President Jean-Claude Trichet. No time has yet been set.

The bailout plan will give Greece time to fix its budget before returning to the market, which it wants to do as soon as possible,” Papaconstantinou said.

About two-thirds of the funds will come from Greece’s 15 euro-area partners, which must still sign off on the disbursement by a unanimous decision. The European Commission said today it approves of Greece’s request for aid. The International Monetary Fund will provide the rest of the funds.

The financial lifeline will last three years and will force Greece to cut its budget deficit below the EU’s limit of 3 percent of gross domestic product by the end of 2014. That’s one year later than originally planned. The shortfall was 13.6 percent in 2009.

The scale of the budget cuts has prompted some economists to speculate that Greece will have to restructure its debt because the strains placed on the economy will be too great. The government now expects the economy to shrink 4 percent this year and 2.6 percent in 2011 before expanding 1.1 percent in 2012 and almost double that in the following two years. In January, it forecast a 0.3 percent contraction for 2010.

At stake is the future of the euro 11 years after its creators left fiscal policy in national capitals. As the Greek talks dragged on this past week, bonds dropped across Europe on investors’ concern that Portugal and Spain will also struggle to cut their deficits.