By Anthony Faiola
Washington Post Staff Writer
Wednesday, March 3, 2010; A11
LONDON -- Seeking to quell fears of a debt default that could rattle world markets, the Greek government is set to unveil a new round of austerity measures Wednesday, a move aimed at shoring up its finances and winning support for aid from its European neighbors.
Yet the plan -- which will include further cuts in salaries for state workers, as well as tax hikes, according to Greek officials -- is likely to intensify public opposition in the Mediterranean nation, where strikes by unions in recent weeks have brought the country to a halt.
Investor fears about unsustainable national debt loads and surges in public spending have swept Europe, hitting even nations such as Britain, where the once-mighty pound fell this week to a nine-month low against the U.S. dollar. In Britain, concern also centers on the possibility of a logjam in Parliament after elections expected in May. Opinion polls show both major parties in a virtual dead heat that could make passage of promised cuts in public spending more difficult.
Yet investors have tended to reward those nations -- such as Ireland -- that take drastic, even painful, steps to get their finances in order. As word spread Tuesday of a new round of cuts in Greece, the value of Greek bonds rebounded on global markets.
Greek Prime Minister George Papandreou is now taking his message of a new spending ethos on a global tour: He is scheduled to meet with German Chancellor Angela Merkel on Friday and then with President Obama in Washington on Tuesday. Greek officials said the talks with Obama will touch on the debt crisis as well as new rules to combat the kind of financial-market speculation that the Greeks say has added to their woes.
Greece is a member of the 16-nation bloc that uses the euro, and officials from across Europe are scrambling to put together a rescue plan for Greece, fearing that a collapse there could damage the currency.
Athens is looking for German backing of a plan that would have state-run and perhaps private banks in Europe's largest economies buy Greek debt at low interest rates. Greece will not be seeking any direct financial assistance from Washington, officials said.
A general mood of unease has hung over Europe, with concern building over a possible "double-dip" recession. In recent weeks, Sweden has fallen back into recession, and fresh signs emerged that the recovery in Germany -- an economic powerhouse that emerged from recession in mid-2009 -- may be faltering.
The problems in Europe, analysts said, are threatening the broader global recovery in the aftermath of the financial crisis and affecting growth prospects in the United States. Already, as the dollar strengthens against the euro and the pound, U.S. products are becoming more expensive on world markets, hurting the competitiveness of American exporters. European debt problems, meanwhile, are weighing on the balance sheets of U.S. banks and pension funds still recovering from the "great recession."
"The European Union is still the world's largest trading bloc, and if the E.U. disappoints economically, that will restrain the path of a global recovery that is already coming through in countries like the United States," said Janet Henry, chief European economist at HSBC in London.
In Greece, the austerity package is meant to bolster confidence and ensure that the government meets targets to cut its whopping 13 percent budget deficit by four percentage points this year.
After a fact-finding mission to Greece last week, European officials demanded that the government make further financial adjustments to merit assistance. On Monday, the European Union's finance commissioner, Olli Rehn, called on Greece to put forward a new plan "in the coming days."
To satisfy those demands, Greece is reluctantly preparing to raise its value-added tax, a national sales tax, as well as taxes on fuel, tobacco and other items, sources familiar with the plan said. In a more controversial move, it appears set to further cut the wages of government workers, which officials concede may raise the ire of union leaders. The full details of the plan are to be worked out and voted on at a meeting of Papandreou's cabinet on Wednesday.
"It's going to be painful, people will protest, but we know Greece has no alterative," said a Greek government official familiar with the plan, who spoke on the condition of anonymity because the plan has yet to be officially announced.
It remains unclear whether those cuts will be enough to please European officials. Greece needs German and French backing, in particular. Authorities in Berlin and Paris are reluctantly drafting a plan that could involve a consortium of state-owned, and potentially private, banks from the bigger European economies purchasing billions of dollars' worth of Greek bonds at low interest rates, helping to provide Athens with the cash it needs to keep the government running this year.