February 2, 2012 / 12:17 PM / 6 years ago

Greek PM seeks to force pledges of more austerity

ATHENS (Reuters) - Greece’s prime minister faces the daunting task of rallying reluctant political leaders behind unpopular wage and pension cuts demanded by lenders as the price for bailout money that is essential to avert a chaotic default.

International Monetary Fund's (IMF) chief of mission Poul Thomsen addresses the audience during an economic conference in Athens December 14, 2011. REUTERS/Yiorgos Karahalis

But even if Lucas Papademos is successful in winning political backing for the reforms — something he is likely to try face-to-face over the next day or so — Athens faces other hurdles as it scrambles to wrap up talks on a 130-billion-euro rescue plan and a bond swap deal before big bond redemptions come due in March.

On the debt restructuring front, action by the European Central Bank and other public creditors to further cut Greece’s debt is proving to be a sticking point as Athens and private bondholders converge on a deal, bankers and officials say.

The debt swap is not expected to be finalized at any rate until Athens can first convince foreign lenders that it is serious about pushing through reforms to reshape the economy.

Papademos, a technocrat appointed in November, could meet the socialist, conservative and far-right leaders in his coalition as early as Thursday or on Friday to win their blessing for reforms needed to secure the bailout, a government spokesman said.

None of them want to be linked to painful reforms ahead of national elections expected as early as April.

Worried about Athens’ commitment to reform, the “troika” of European Union, European Central Bank and International Monetary Fund lenders have demanded it push through measures like lowering the minimum wage level and cutting holiday bonuses.

But those demands have met resistance in Athens, where officials fear further cuts could deepen an already brutal recession and heap new burdens on long-suffering Greeks.

The two sides still need to reach agreement on major issues like wages, pensions and the recapitalization of banks on Thursday before Papademos can present the plan to political leaders, the government says.

Athens is under pressure to wrap up the talks before a meeting of euro zone finance ministers on Monday to discuss the bailout package and the debt swap.

“Today is a very important day,” government spokesman Pantelis Kapsis told Greek MEGA television on Thursday.

“The discussions are very tough. On the one side, there is pressure to restore the economy’s competitiveness fast. We are saying that there is clearly an issue of competitiveness. On the other hand, there is also the question of recession which is very important for Greece.

“RED LINES”

On the whole, the lenders have demanded extra spending cuts worth about 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defense and health spending.

With the country dependent on bailout funds for survival, Athens acknowledges it has little bargaining power despite a public outcry against round after round of austerity that has driven up unemployment and spurred near-daily protests.

“In the end, we’ll have 10 red lines and the need to make a decision: Are we going to stick to those red lines or do we want the loan? It’s that simple,” said Kapsis when asked if Athens would draw the line on imposing pain on its people.

The initial trigger for the euro zone debt crisis, Greece is now in its fifth year of recession. Spending cuts and tax hikes have failed to put the country’s finances back on track and instead led to bouts of social unrest.

Unemployment hit a record high of 18.4 percent in August last year, and nearly one in two Greek youth are out of work.

Economists polled by Reuters in late January expected the Greek economy to shrink 3.7 percent this year after a 6 percent slump last year.

The IMF on Wednesday signaled it was time for a new policy mix that focused more on reforms and less on tax hikes aimed at cutting the deficit.

But Greece’s inability to push through such reforms and crack down on tax evasion has spurred growing concern that repeated bailouts are only a temporary bandage and that European partners will soon be forced to stump up more money.

Policymakers, however, fear a messy default by Athens could spread turmoil across the euro zone and drag far bigger economies like Italy and Spain into the danger zone.

Without the second bailout and a debt swap deal with private bond-holders, a chaotic default could come as early as March 20, when Athens must buy back 14.5 billion euros of debt.

“As a country, we are on the verge of an official default,” Kapsis said.

“We have borrowed a lot of money all these years and we now have our backs against the wall. We need to make our own decisions. Nobody will get us out of this situation.”

Writing by Deepa Babington. Editing by Jeremy Gaunt.

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