Markets skeptical of 4-year plan

The Greek government will cut spending and raise revenues by 10 billion euros this year as part of a four-year plan to bring the deficit down but markets remained skeptical about whether the country can deliver on the cuts and put an end to its fiscal crisis. «We will do whatever it takes,» Prime Minister George Papandreou said yesterday. «Our country can and is obliged to exit this vicious circle of misery as soon as possible. We will not retreat; we will proceed quickly.» The plan, to be presented to the European Commission today, was approved by the Cabinet and aims to cut the shortfall from 12.7 percent of output, more than four times the EU threshold, to 8.7 percent this year. That reduction will be achieved even though the economy will contract by 0.3 percent, according to the plan. The budget deficit will hopefully shrink to 5.6 percent next year and 2.8 percent in 2012. The country’s fiscal ills have prompted downgrades of its credit rating and a sharp rise in borrowing costs. Markets continued to punish Athens yesterday. Yield spreads between Greek bonds and German Bunds widened to 270 basis points, up about 10 bps from Wednesday. The cost of securing Greek debt also hit a new high. «Greece’s goals are ambitious, its growth and debt forecasts too optimistic,» Giuseppe Maraffino, a fixed-income strategist at Unicredit SpA in Milan, told Reuters. «It is very likely the European Commission will not accept this plan and that it will ask for some changes. The market reaction was not good and I expect uncertainty and volatility to remain high in the coming days, with the spread against Germany likely to widen further.» The plan projects unemployment at 9.9 percent this year, rising further to 10.5 percent in 2011 and 2012. It promises to start generating primary surpluses from 2011, and laid out a 13-billion-euro decline in borrowing this year, to 53.3 billion euros. Comments by European Central Bank President Jean-Claude Trichet in Frankfurt yesterday that no government can expect «special treatment» also made investors nervous. Trichet’s comments raised concern that Greece’s bonds may no longer be eligible for ECB money-market operations when the bank reverts to its pre-crisis criteria in about a year’s time. Meanwhile, a Reuters poll showed that analysts see a one in five chance that Greece will seek a financial bailout and say Ireland, Spain and Portugal are the economies most likely to suffer a similar setback in investor confidence. Eurozone exit is ‘absurd’ The idea that Greece could be forced to leave the eurozone is an «absurd hypothesis,» European Central Bank President Jean-Claude Trichet said yesterday. Asked how realistic he thought talk of Greece or any other member of the 16-strong club being pushed out of the euro area, Trichet told reporters, «I myself do not comment on absurd hypotheses, so that would be my response.» However, he also added that Greece had much work ahead of it, while declining to comment on its three-year plan to slash its budget deficit. German Chancellor Angela Merkel yesterday pointed out that Greece’s mounting budget deficit risks hurting the euro, saying the currency faces a «very difficult phase.» «The Greek example can put us under great, great pressures,» she said. «Who will tell the Greek Parliament to please go ahead and pass a pension reform? I don’t know that they’ll be enthusiastic about Germany giving them instructions.» German lawmakers wouldn’t be happy if Greece told them what to do, she said. «So the euro is in a very difficult phase over the coming years.»

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