Greece's new government pledged in its 2010 draft budget on Thursday to save the country from bankruptcy by cutting the deficit while keeping electoral promises to weather the impact of the crisis and help the poor.
Greece forecast on Thursday a 0.3 percent contraction of its GDP in 2010 whereas the EU sees most other euro members growing out of recession. It will become the euro zone's most indebted country, after being second to Italy for years.
"We need to save the country from bankruptcy," Socialist Prime Minister George Papandreou, who won an Oct. 4 election, told a televised cabinet meeting. "We can get out of the crisis."
Greece aims to reduce its budget deficit by more than 3 percentage points of gross domestic product (GDP) next year but the ratio will still be three times larger than the 3 percent ceiling set for euro area members, the government said.
It plans to reduce the deficit with spending cuts and a net revenue increase of 9 percent via a crackdown on tax evasion as well as tax increases on tobacco, alcohol and real estate [ID:nL5448350].
Social support measures to help kickstart the economy include one-off solidarity benefits to low income earners, increase of unemployment benefits and above-inflation wage and pension increases for state workers.
"It is a budget for Greek economy's growth, it is a budget of redistributing (wealth) and it is a budget of tidying up," Finance Minister George Papaconstantinou told a press conference.
The government said the draft budget would aim at re-establishing the confidence of the EU and investors in the Greek economy. Moody's put Greece on review for possible downgrade last week, after Fitch cut the rating earlier in October.
"The dynamics of the public debt is a bomb on the foundation of the Greek economy," Papaconstantinou said.
AMBITIOUS TARGETS
Analysts said the deficit reduction target was ambitious and it would be difficult to cut spending while increasing social support. But they welcomed the government's announcements as more realistic than in previous years.
"The greatest difficulty lies in the achievement of the target to cut expenses along with the implementation of the support measures for the low-income earners," said Nikos Magginas, an economist at National Bank of Greece.
"At first sight, the growth forecast looks more realistic than what we used to expect from the previous Greek budgets," said Diego Iscaro, an analyst at IHS Global Insight.
"They need to show that they are committed to bringing the public account back to a sustainable path, given the lack of credibility," Iscaro said.
Neither the 10-year Greek debt yield <GR10YT=RR> spread nor five-year Credit Default Swaps (CDS) moved after the comments, according to Reuters data and CDS monitor CMA DataVision. The debt yield spread was steady at 138 bps at 1140 GMT and the CDS was also stable at 143 bps.
"The market has anticipated the figures, so there was no impact at all on Greek bonds yield spread," said Theofanis Mylonas, head bond trader at EFG Eurobank.
The budget shortfall will narrow to 9.4 percent of GDP in 2010 from 12.7 percent this year, Papaconstantinou said. The economy will keep contracting, albeit at a slower pace, after falling into recession this year for the first time since 1993 with GDP down by 1.5 percent.
Greece's debt will swell to 120.8 percent of GDP in 2010 after increasing by 14 percentage points to 113.4 percent this year, the draft budget showed. Papaconstantinou had earlier put this year's increase at 13 percentage points.
The government declined to say how much Greece would need to borrow next year, saying more details will be given in the final budget proposal on Nov 21.
