Greece’s cabinet has approved large spending cuts and given the green light to a controversial plan aimed at slashing the size of the country’s public sector, in order to secure its next round of bailout money.

But there are doubts whether Greece’s second bailout package can succeed, given that Greece’s vicious recession has caused the country’s deficit to worsen.

The cabinet meeting took place hours after Greece’s finance minister, Evangelos Venizelos, wrapped up negotiations with the representatives of the “troika” — the European Commission, the International Monetary Fund and the European Central Bank.

Under pressure from the troika, and against a backdrop of public protests, the Greek cabinet has agreed to a controversial plan to transfer about 30,000 public servants into a special labour reserve where they will receive roughly 60% of their present salary. At the end of a year, the public servants could face outright dismissal.

Tonight, Venizelos will attend an emergency meeting of eurozone finance ministers who will assess whether Greece has done enough to receive the next €8 billion ($US10.7 billion) payment from its current bailout package. He appeared confident that the funds would be unlocked. In an interview with a Greek newspaper published on Sunday, he said, “given that we’re taking such tough measures … the sixth tranche is assured.”

However, a final decision on the payment is not expected to be taken until the troika has completed its latest report, and Greece needs the extra funding urgently. Even if the EU and the IMF approve the payment by mid-October, funds are running so low that the Greek finance ministry may be forced to postpone salary and pension payments that are due in the next two weeks.

At the same time, Greece’s worsening financial plight has caused the country’s deficit to blow out more than expected, and is casting a cloud over the country’s second €160 billion bailout, which was finally cobbled together after painful negotiations in July.

According to the draft 2012 budget, Athens is now expecting that its deficit will hit 8.5% of GDP this year, more than its target of 7.6%. Next year’s deficit will be reduced to 6.8% of GDP, which is also above the 6.5% target.

Athens now forecasts that Greece’s economy will shrink by 5.5% this year, and 2% next year. These figures are consistent with those that the IMF published last month, but worse than those used in the second bailout plan for Athens, which forecast that the Greek economy would start growing next year.

The growing realisation that Greece’s funding needs will be greater than envisaged in July’s agreement has prompted countries such as Germany and the Netherlands to argue that private sector lenders to Greece — such as banks, insurance companies and pension funds — should suffer heavier losses on their loans. France and the European Central Bank are strongly opposed to any such move.

Meanwhile, German finance minister Wolfgang Schäuble has vehemently denied that Germany would boost its contribution to the eurozone’s bailout fund beyond the €211 billion that German parliament approved last week.

The bailout fund, he said in a magazine interview published on Saturday, “has a ceiling of €440 billion, €211 billion of which is coming from Germany. And that’s all. Finished.”

But German voters are sceptical about their government’s promises that the bailout fund will not be boosted. According to an opinion poll published Sunday in the German newspaper Bild am Sonntag, a huge majority of Germans believe that their government’s promise not to increase the size of the bailout fund in future lacks credibility. A total of 78% of those polled expected the bailout fund would be expanded in future, while only 19% believed that its resources would not be boosted.

*This article first was first published at Business Spectator

Peter Fray

Fetch your first 12 weeks for $12

Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey

JOIN NOW