Greece starts austerity push as nation seethes

By Harry Papachristou

ATHENS, June 6 (Reuters) – Greek Prime Minister George Papandreou started a campaign on Monday to secure a new international bailout by imposing years of austerity on a nation already seething over corruption and economic mismanagement.

Unease is growing within Papandreou’s ranks about the consequences of waves of budget cuts demanded under successive deals with the European Union and IMF — and this could turn into alarm after at least 80,000 Greeks crammed a central Athens square to vent their anger over the nation’s dire state.

As the government struggles to prevent Greece from defaulting on its debt, the Socialist cabinet began discussing the medium-term economic plan which will impose 6.4 billion euros of extra savings this year alone.

This is the first stage of a drive to turn the plan, agreed on Friday with the EU and IMF as the price of a new financial rescue, into law despite signs of dissent in the ruling party.

Papandreou will present the plan to the political council of his PASOK party on Tuesday, before the cabinet clears it the following day and sends it to parliament.

Greece’s international lenders say the new bailout package, which would replace a 110 billion euro deal agreed only a year ago, depends on Athens keeping to its promises for further austerity and accelerated privatisations.

Germany’s Deutsche Telekom said it would buy an extra 10 percent of Greece’s OTE telecom company from the state for about 400 million euros, taking its stake to 40 percent. However, this did not amount to a new privatisation as the sale was made under a deal struck in 2008.



Papandreou is under huge pressure from voters who are suffering under pay and pension cuts and soaring unemployment.

Under Greece’s austerity policies, unemployment has already hit 15.9 percent of the workforce and the medium-term plan aims for a further 22 billion euros in budget steps in 2012-15.

On Sunday night people crammed into the capital’s Syntagma Square to show they are close to the limit of their endurance. Police put the turnout at 80,000, the biggest in a series of 12 nightly rallies inspired by Spain’s protest movement.

Greece’s first, 110 billion-euro, bailout assumed that it could resume borrowing commercially early next year. This now appears inconceivable, meaning a new package is vital.

Papandreou has used his parliamentary majority to ram through successive rounds of austerity. But faced with the popular anger, some PASOK lawmakers are becoming uneasy.

A group of 16 wrote to the prime minister on Thursday demanding a full party debate on the medium-term plan as “a matter of patriotism and democracy”.

Interior minister Yannis Ragousis warned that rocking the boat could lead to early elections. Opinion polls suggest this would produce a political stalemate, raising the risk that the new bailout deal with the EU and IMF might unravel.

“Anyone who drives the nation towards elections now will be effectively giving it the last push over the cliff,” Ragousis told Sunday’s edition of the Realnews newspaper.

In Berlin, a German government spokesman said Chancellor Angela Merkel backed plans for private creditors to share in the burden of covering Greece’s funding.

The European Central Bank opposes any attempt to cut the overall value of creditors’ bond holdings, known as a haircut.

“Imposing haircuts on private investors can seriously disrupt the financial and real economy of both the debtor and creditor countries,” ECB board member Lorenzo Bini Smaghi said on Monday. “This is why such restructuring should only be the last resort.”

The ECB fears any failure to repay creditors in full would provoke a crisis at weaker banks with big Greek debt holdings, leading to a violent reaction on global financial markets.

However, creditors may be asked to buy new Greek bonds when old ones mature, to avoid Athens having to produce more money up front. Another ECB policymaker, Juergen Stark, gave his cautious backing last week for a debt rollover, provided that it was not perceived as a default. (Additional reporting by Edward Taylor in Frankfurt; writing by David Stamp, editing by Mike Peacock)