Greece rushes to adopt emergency laws

Compiled by Ben Woodhead

Greece is scrambling to adopt a batch of emergency laws that will further cut incomes and government spending, a day after securing a new bailout and debt relief deal designed to stave off bankruptcy.

The new austerity measures demanded by creditors in return for the rescue loans follow two years of deepening misery, with the Greek economy in freefall, unemployment at a record high and the state of the public finances in worse shape than previously forecast. Angry unions have called two separate protest rallies outside parliament in the afternoon.

• Harsh reality starts to sink in for Greece
• Two decades of work lies ahead
• Germany opposes enhanced eurozone bailout fund
• French Socialists dig in heels on EU austerity
• EU to freeze €495m in Hungary funds

On Tuesday, the 17-country eurozone approved Greece’s second financial lifeline in less than two years, worth €130 billion, and a €107 billion debt writedown on banks and other private holders of Greek bonds.

In response to the writedown agreement, Fitch downgraded Greece’s credit rating further into junk status, from CCC to C.

The agency said a Greek default “is highly likely in the near term” and added that it would briefly consider placing Greece in “restrictive default” once the bond swap is completed - a warning it first issued in June.

HARSH REALITY STARTS TO SINK IN FOR GREECE

Athens argues that the default rating would be a simple technicality, as the twin deals struck on Tuesday will allow the country to repay bonds maturing next month - thus avoiding a disorderly default - and remain in the common European currency it joined in 2001.

Even then, the price of salvation for ordinary Greeks is only just starting to sink in.

Legislation tabled in parliament late on Tuesday outlines a total €3.2 billion in extra budget cuts this year agreed by the cabinet last week.

The measures include nearly €400 million in cuts to already depleted pensions. Health and education spending will be reduced by more than €170 million, subsidies to the state health care system will be cut by €500 million, and health care spending on medicine will fall by €570 million. And some €400 million will be lopped off defence spending - three quarters of which will come from purchases.

The draft law also drastically revises the 2012 budget, changing the deficit target to 6.7 per cent of gross domestic product from an initial forecast of 5.4 per cent. Even worse, plans for a modest primary surplus - which excludes debt servicing costs - have been scrapped and Greece will instead post a primary deficit of nearly €500 million, or 0.2 per cent of GDP.

Parliament is expected to vote on the cuts and budgetary revisions early next week.

On Wednesday, debate will start at committee level on a separate draft law on adopting the private debt writedown. Parliament’s plenary session will vote on the draft law on Thursday.

TWO DECADES OF WORK LIES AHEAD

The new Greek legislation is expected to be approved, as the interim governing coalition headed by technocrat prime minister Lucas Papademos controls 193 of the House’s 300 seats. But earlier this month the two coalition partners - the majority Socialists and the conservatives - were forced to expel a total 43 deputies who rebelled against new austerity cuts.

It remains uncertain whether even the combination of new bailout and writedown will be enough to save Greece, whose economy is in a fifth year of recession and could continue to shrink as the cutbacks cripple consumer spending and investment.

Werner Hoyer, the new president of the European Investment Bank, told Germany’s Handelsblatt newspaper that “Greece now needs, alongside the unavoidable austerity program, a Marshall Plan Two “ - a reference to the US aid plan that rescued an impoverished Europe after World War II.

Hoyer suggested that Greeks working in the European Commission and other EU bodies should be motivated to return home and help out, to avoid the impression that Greece “is under tutelage and directed by others”.

But he said the structural reforms Greece needed could take up to two decades.

Angry Greek unions have called a protest rally against the new belt-tightening outside Parliament on Wednesday. Communist supporters will hold a separate march an hour later, while other protesters are planning a motorcycle rally. Previous protests have turned violent, and rioters burnt and looted dozens of shops in central Athens during a rally on February 12.

Papademos, who is unelected, has a sole mandate to see through the twin bailout and debt relief deal, and is expected to step down by early April ahead of national elections. Polls show that conservative New Democracy would likely come first, but without a large enough majority to govern alone.

GERMANY OPPOSES ENHANCED EUROZONE BAILOUT FUND

Even as Greece worked to implement the new bailout arrangements Germany threatened to undermine this week’s last-minute deal by refusing to increase the firewalls to prevent the eurozone debt crisis spreading.

Angela Merkel’s chief spokesman said Berlin saw “no necessity” to enhance the planned €500 billion European Stability Mechanism (ESM), the new bailout fund due to be in place from July.

This sets the German government at loggerheads with not only the Dutch government but also the IMF and its managing director, Christine Lagarde. Both want the ESM to embrace funds still untouched within the current rescue fund, the European Financial Stability Facility (EFSF).

It has between €150 billion and €250 billion left, allowing the combined funds to reach €650-EUR750 billion - still well short of the €1 trillion originally forecast, let alone the €2 trillion demanded by market players. Lagarde favours at least €1 trillion being set aside - and has further ruffled Berlin by calling for eurobonds to cover not only Greek but also, for example, Spanish and Italian debt in event of a wider crisis.

The IMF managing director is refusing, ahead of next week’s G20 in Mexico, to commit the IMF to a specific share of the new €130 billion bailout for Greece. Wolfgang Schauble, German finance minister, has said it will be €13 billion plus €10 billion rolled over from the first €109 billion rescue.

This would amount to just 10 per cent of the new fund compared with the 27 per cent the IMF contributed to the first one. The Washington-based body is under pressure from the White House to resist European demands for more funds.

Jan Kees De Jager, Dutch finance minister, who helped broker the February 21 deal on Greece, has made his support for the package dependent on an enhanced EFSF/ESM combination.

FRENCH SOCIALISTS DIG IN HEELS ON EU AUSTERITY

French Socialists also cast doubt over the future of the ESM by abstaining in a parliamentary vote on Europe’s future bailout fund, providing new fodder for concern among EU-watchers about how a possible left-wing presidential election victory would affect the euro zone crisis.

The Socialist Party, whose candidate Francois Hollande leads opinion polls for the April-May election, sat out Tuesday’s lower house vote to create a permanent European Stability Mechanism (ESM) in protest at austerity policies in Europe.

President Nicolas Sarkozy’s conservative government called the move a “historic error” and berated the Socialists in parliament on Wednesday. Even the left-leaning newspaper Liberation was critical in an editorial.

“A vote today against the ESM is a vote against Europe, a vote against the euro and a vote against European solidarity, and it’s not behaviour fitting to the gravity of the situation,” government spokeswoman Valerie Pecresse said.

Prime Minister Francois Fillon accused the Socialists of bringing election campaign tactics into parliament.

In a scolding comment, Liberation said left-wingers were acting like ostriches. “Some of them quibbled, most found the most pressing thing to do was not decide and others stepped up their vindictive jibes,” it said. “If the left wins power, it needs to do better. And know what it wants.”

The abstention, which did not prevent the bill passing in the conservative-led National Assembly, was in line with Hollande’s campaign pledge to seek to amend an EU fiscal compact agreed last month to add clauses on growth and investment.

While Hollande is staunchly pro-European and advocates fiscal discipline, his stance raised questions about the compatibility of his views with Germany’s in resolving the euro zone’s sovereign debt crisis.

“I don’t think this is a game changer. But it can be interpreted as revealing a part of the Socialist platform - that to be European we have to be very pro-growth - which is at odds with the Germanic view on what solidarity means,” said George Magnus, senior economic advisor at UBS.

“If we see more instances like this in the run-up to the election, they could be perceived as marking out a political and negotiating position vis-a-vis Germany which would be seen as quite different and potentially capable of causing uncertainty about how the process would evolve.”

The ESM bill passed by 256 votes to 44, with 131 abstentions. Only the ruling UMP and centrists voted.

EU TO FREEZE €495M IN HUNGARY FUNDS

Elsewhere in debt-addled Europe, Brussels is proposing to freeze €495 million in EU funds destined for Hungary in 2013, the European Commission said, the first time it has ever taken such a measure.

“This unprecedented step follows the Commission’s repeated warnings to Hungary urging it to step up its efforts to end the country’s excessive government deficit, and its subsequent failure to take appropriate action,” the Commission said in a statement.

The freeze in so-called cohesion funding, aimed at reducing economic disparities across the 27-nation, would take effect January 1, 2013 and would concern 29 per cent of Hungary’s allocations for the year.

The European Union executive last month concluded that Hungary had not taken effective action to reduce its deficit below the target of three per cent of gross domestic product by 2011 “in a sustainable and credible manner”.

“Today’s proposal should be seen as a strong incentive for Hungary to conduct sound fiscal policies and put in place the right macro-economic and fiscal conditions to ensure an efficient use of Cohesion Fund resources,” Economic Affairs Commissioner Olli Rehn said.

“It is now for the Hungarian government to act before the suspension takes effect,” he said.

Rehn told a news conference that Hungary has been in excessive deficit ever since its EU accession in 2004, adding that the deadline for Budapest to get back within the limit had already been pushed back by three years.

Rehn’s office said in January that Hungary formally respected the threshold last year, but he stressed on Wednesday that this was only possible due to one-off measures worth “around 10 per cent of GDP.”

Without a key transfer of private pension funds to the public books, the commission maintains the deficit would have hit six per cent of gross domestic product.

The commissioner said the suspension threat was both fair and proportionate.

EU regional policy commissioner Johannes Hahn said the “overarching aim” of the decision was “to prevent further difficulties,” and underlined: “If Hungary takes corrective action, the funds will be available again to spend.”

Projects including flood protection around the Danube could suffer if Budapest does not respond to the commission demands.

He added: “The ball is now in the Hungarian camp.”

Reuters, Guardian, AFP, AP

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