Greece resets debt goals

GREECE has unveiled new budget deficit targets and plans to trim its civil service to meet creditors' demands ahead of a eurozone meeting that could free up an ?8 billion ($A11.17 billion) loan.

By InvestSMART · 4 Oct 2011

By InvestSMART ·
4 Oct 2011

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GREECE has unveiled new budget deficit targets and plans to trim its civil service to meet creditors' demands ahead of a eurozone meeting that could free up an ?8 billion ($A11.17 billion) loan.

The 17 countries that share the debt-challenged euro currency met in Luxembourg overnight to try and reach agreement on releasing the bailout tranche, which has been blocked by auditors for the past month.

Divided eurozone ministers will seek to avert a Greek default, which could send sharemarkets into a panic, deal an unprecedented blow to the European currency and bring the world back to the brink of a fresh financial crisis.

British Prime Minister David Cameron has warned that the eurozone must act decisively as it was posing "a threat to the worldwide economy", he told BBC television.

After an extraordinary cabinet meeting late on Sunday, the Greek government announced that its budget deficit should drop to 8.5 per cent of gross domestic product in 2011 from 10.5 per cent last year, and in 2012 to 6.8 per cent of GDP. Both deficit targets hover above the initial forecasts fixed in June of 7.4 per cent of GDP in 2011 and 6.5 per cent in 2012.

"This marks the country's entry into another financial phase," the Finance Ministry said of the outlook for 2012 when Greece should record for the first time a primary surplus of ?3.2 billion.

"The additional measures that have been decided and announced for 2011 and 2012 amount to ?6.6 billion."

Following its consultations with EU and IMF auditors, the government also unveiled a plan to shrink the bureaucracy by placing 30,000 civil servants temporarily in a "labour reserve".

Greek civil servants' jobs are protected by the constitution, but the government overcame the obstacle by placing those workers close to retirement in reserve and scrapping various state organisations and putting their employees in reserve.

Finance Minister Evangelos Venizelos said the government had developed the scheme effectively laying off state workers with "transparent and objective" criteria.

EU-IMF auditors spent the weekend in Athens trying to obtain the most accurate picture of Greece's finances, after protests, including staff occupations of ministries, meant a slow resumption of negotiations last week.

Athens is labouring under a crushing ?350 billion or more of debts, and the government says it needs the bailout loan to pay salary and other bills this month.

Mr Cameron told the BBC it would be "very bad" for Britain if the eurozone broke up, given that 40 per cent of British exports went to those 17 countries.

The United States and other major economies are showing growing signs of concern that Europe is too divided to solve the Greek problem or deal with problems in the much bigger Italian economy, and adequately recapitalise banks that lose heavily in the event of default.

Outside Europe, the fear is that a ricochet effect could charge through global financial markets as data increasingly points towards renewed recession.

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Frequently Asked Questions about this Article…

What new Greece budget deficit targets were announced and what do they mean for investors?

Greece said its budget deficit should fall to 8.5% of GDP in 2011 (down from 10.5% last year) and to 6.8% of GDP in 2012. Those targets are still above earlier forecasts set in June, and the plan also aims for a primary surplus of €3.2 billion in 2012. For everyday investors, higher-than-expected deficits can signal ongoing fiscal strain and market volatility until creditors are satisfied and the bailout process moves forward.

How could Greece’s plans to trim the civil service affect the country’s finances and market confidence?

The government unveiled a plan to place 30,000 civil servants temporarily in a 'labour reserve' and to scrap certain state organisations, a move designed to cut public payroll costs. Finance Minister Evangelos Venizelos said the scheme uses 'transparent and objective' criteria. For investors, such measures aim to reassure EU and IMF auditors and could help unlock bailout funds, but they also risk social unrest and short-term uncertainty in Greek markets.

Why is the €8 billion Greek bailout tranche important and what’s holding it up?

The article says a eurozone meeting could free up an €8 billion loan that Greece needs to pay salaries and bills this month. That tranche has been blocked by EU-IMF auditors for about a month while they seek an accurate picture of Greece’s finances. For investors, release of the tranche would reduce immediate funding pressure on Greece and could calm markets, while continued delays increase default risk and volatility.

What role are EU and IMF auditors playing in the Greek bailout negotiations?

EU-IMF auditors have been in Athens to verify Greece’s finances and have delayed releasing the bailout tranche until they are satisfied. Their work followed protests and slow negotiations. Auditors’ approval is a key condition for disbursing rescue funds, so investors watch their findings closely as a signal of whether bailout support will proceed.

How large is Greece’s public debt and why does that matter for global markets?

The article states Greece is carrying about €350 billion or more in debts. That heavy debt burden is why Greece urgently needs bailout funds to meet short-term obligations. Markets worry that a Greek default could trigger broader contagion, pressure the euro, and force bank recapitalisations — all factors that can ripple into global sharemarkets and investor portfolios.

Could a Greek default affect other countries and my investments outside Greece?

Yes. The article highlights concerns from leaders like Britain’s prime minister and other major economies that instability in Greece — and potentially larger economies such as Italy — could threaten the eurozone and global growth. For example, 40% of British exports go to the 17 eurozone countries mentioned. A default could undermine banks and global markets, so international investors often reassess risk exposure when Greece’s situation deteriorates.

What fiscal measures did Greece quantify for 2011–2012 and how big are they?

Greece announced additional measures totaling about €6.6 billion for 2011 and 2012 to help meet its revised deficit goals. These measures, together with civil service cuts and other reforms, are intended to meet creditors’ demands and secure bailout support — developments investors monitor for their impact on market confidence and sovereign risk.

What are the broader economic risks if European leaders fail to resolve the Greek crisis?

The article warns that a failure to act decisively could lead to a Greek default, put the euro under unprecedented pressure, and risk sending global sharemarkets into panic. Outside Europe, there’s concern about a ricochet effect through global financial markets and a possible return to recession if the crisis spreads or banks face heavy losses requiring recapitalisation.