Gov’t seeks 2 bln euros in new taxes

Finance Ministry leaves open the possibility of further measures being introduced in October

Economy and Finance Minister Yiannis Papathanassiou (left) said Greece’s economy will stall this year.

Taxpayers will have to dig deeper into their pockets to support sagging government revenues after the government announced yesterday a 1.9-billion-euro package of new tax measures.

Economy and Finance Minister Yiannis Papathanassiou also admitted that the economy will stall this year, reversing a previous growth forecast of 1.1 percent.

«The extraordinary crisis requires extraordinary measures,» said the minister.

The package includes higher taxes on fuel, mobile phones, lotteries, horse betting, cars with more than 2-liter engines and recreational boats over 10 meters in length.

The government expects to collect about 1 billion euros from legalizing unauthorized home construction, Papathanassiou said.

Spending cuts and a crackdown on tax evasion would narrow the deficit by another 400 million euros, added Papathanassiou, who left open the prospect of further measures in October.

Greece is under increasing pressure from the European Commission to speed up budget-cutting moves to bring the deficit back to within the EU limit of 3 percent by the end of 2010, or it may face fines.

Without further measures to rein in government spending and boost revenue, the International Monetary Fund said, the budget shortfall could widen to at least 6 percent of GDP this year and to more than 7 percent next year.

Economists remained skeptical about the effectiveness of the new measures, saying they may hurt Greece's growth prospects without reducing the deficit.

In March, the government opted for a one-off tax on individuals earning more than 60,000 euros, along with a freeze on public sector wages for people earning more than 1,700 euros a month.

On the growth front, Papathanassiou said the economy will begin to recover at the end of the year with positive growth expected in 2010.

Oppositions parties accused the conservative government of running up massive budgetary debts that have little to do with the crisis.

«Eleven million people are being called on to put their hands in their pocket to cover weaknesses, incapabilities and negligence shown by the government,» said PASOK's Michalis Chrysochoidis.

News that the Greek government will up taxes by some 2 billion euros in a bid to help improve its fiscal health pleased fixed income markets yesterday.

Premium investors' demand to hold 10-year Greek government debt rather than eurozone benchmark German Bunds fell to its lowest point in nearly a week.

The yield spread hit 172 basis points intraday and was last seen at 175 bps. Late in Europe on Wednesday, the spread was at 183 bps.

«It appears to me to be a combination of those tax measures but also the one-year European Central Bank liquidity from Wednesday, which is pulling in all the eurozone spreads generally,» Peter Chatwell, a bond strategist at Calyon in London, told Reuters.

«Greece is going to outperform when spreads are tightening in this wholesale manner. And there is still the impact of the Greek funding situation and possible buybacks. So there are buyers out there for all of these reasons,» he added.

Economy and Finance Minister Yiannis Papathanassiou left open the possibility of introducing further tax measures to support budget revenues in October.