GREEK government announced more austerity measures yesterday as it battled to convince international creditors that it deserves the next tranche of its bailout cash.
Its new draft budget predicts the economy will shrink by 3.8 per cent in 2013, its sixth consecutive year of recession.
That represents a stark turnaround from EU estimates back in May that predicted the economy will stop shrinking next year ahead of a recovery into 2014.
The continued recession means tax revenues are lower than hoped, while welfare spending is higher.
As a result the government has had to propose additional pay, pension and welfare benefit cuts as part of an €11.5bn (£9.2bn) savings package to be implemented by the end of 2014.
The government hopes to run a primary budget surplus next year – that is, it will only need to borrow to cover interest on its debts, not its current and capital spending.
That would be the first such surplus in a decade, and convince other countries it is making progress in cleaning up its public finances.
If the Troika of the International Monetary Fund, European Commission and European Central Bank accepts the offer, it will give the government the next €31.5bn tranche of its €130bn bailout, allowing it to avoid bankruptcy.
“There are discussions on the measures. The troika wants clarifications,” finance minister Yannis Stournaras said after meeting with creditors. However, officials said inspectors doubt that €2bn of measures will actually be delivered.
And analysts warned the bailout alone may not be enough to keep Greece in the Eurozone.
“The more pessimistic growth and budget forecasts have led the government to raise the public debt to GDP ratio forecast to 179 per cent next year, far higher than the forecast of 167 per cent in the original bail-out plan,” said Ben May at Capital Economics.
“This could have major implications for the IMF’s involvement in the bail-out since, in principle, it will only lend to governments if the deal is expected to reduce the recipient government’s public debt to a sustainable level.”
“A collapse of the rescue package may prompt Greece to leave the Eurozone, perhaps within a few months.”