In an effort to win a second round of international financial aid, Greek Prime Minister George Papandreou proposed late Sunday $8.8 billion of austerity measures, including a plan to create a “labor reserve” that would push 30,000 public employees out of their jobs.
The steps would reduce the country’s 2011 deficit to roughly 8.5 percent of its gross domestic product, which is still higher than the 7.6 percent target set by the European Union and the International Monetary Fund as part of Greece’s bailout agreement.
Greece’s measures came the night before European finance ministers met in Luxembourg Monday to discuss whether to provide more aid to the ailing country.
A significant roadblock to an agreement is Finland’s recent demand that Greece post collateral in exchange for a second round of bailout funds. There were media reports Monday that leaders were close to a resolution, but Finnish Finance Minister Jutta Urpilainen said a deal is uncertain, according to Bloomberg News.
Investors are increasingly worried that neither the government in Athens nor the European Union is taking strong enough steps to keep Greece from continuing its downward spiral. The Greek government faces the prospect of falling ever deeper into debt with little ability to pay off its existing loans.
Europe is hampered by the need to win consent from all 17 countries that share the euro currency to take major actions to shore up Greece and other struggling nations. And German voters, who finance the biggest share of the European bailouts, are increasingly unhappy about new demands on their pocketbooks.
A proposal to expand the European bailout fund, which is already providing emergency loans to Greece, is facing a series of votes in European parliaments. But just months after European leaders agreed to expand the fund, the plan appears woefully inadequate for the scale of Greece’s needs.
A delegation of officials from the International Monetary Fund, the European Commission and the European Central Bank has been in Athens since Thursday and is expected to remain there much of this week. Greek officials are trying to persuade them that the country has made enough progress toward agreed budget targets to qualify for an additional $11 billion in bailout funds. The money, they say, is vital for Greece to keep paying its bills.
That payment is likely to be handed over, if only because the prospect of a sudden, disorderly Greek default is too much for European officials to countenance. They worry the fallout could spread far beyond Greece’s borders.
Whether more installments will be approved, or whether Greece will simply be forced to partially default on its debts, is in question. The economic growth figures announced Sunday mean that the government will need to find an additional $2.7 billion just to pay its bills this year.
European officials say part of the problem is that Greece has not successfully reduced its spending to the level requested by the terms of the bailout. In fact, many officials say privately, the government has failed to carry out many of the unpopular austerity measures that it has already approved in parliament.
Papandreou told his Cabinet Sunday that “we have a single and steady goal — to meet our commitments so that we guarantee our credibility,” his office said in a statement.
Revised data Sunday projected that Greece’s economy would shrink by 5.5 percent this year, not the 3.8 percent that had been forecast.
On Monday, France’s CAC index and Germany’s DAX both fell roughly 2 percent. London’s FTSE was down 1.31 percent. The banking sector — including French banks Credit Agricole and BNP Paribas, both of which have a high exposure to Greek debt — was particularly hard-hit.
Yang reported from Washington.