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Greece announces austerity plan

Published:Thursday | March 4, 2010 | 12:00 AM

Greece announced painful new austerity measures on Wednesday, cutting salaries for government workers and raising taxes at the sales register, winning approval from the European Union (EU) as it tries to snuff out a financial crisis that threatens Europe's economy.

The government also said it wouldn't rule out turning to the International Monetary Fund (IMF) for help, a move that has been resisted by the EU.

The decisions to make the cuts were "not taken out of choice but out of necessity," Papandreou said as he briefed the country's president on the new measures, which amount to savings of ?4.8 billion (US$6.5 billion), or roughly 2 per cent of the entire Greek economy.

Bond ratings agencies - whose approval is crucial to taking pressure off Greece's finances - liked the plan. Moody's said they were a "clear manifestation" of resolve to regain control of Greece's strained public finances and increase the probability that the debt situation in Greece will be stabilised.

The cuts are aimed at winning EU support for the country's efforts and possibly opening the door to a financial backstop by fellow European governments. That would pave the way for a bond offering in the coming days that is needed to roll over debts that are coming due. Greece must roll over ?54 billion this year.

A Greek default or an expensive bailout would be a blow to the euro and the 11-year-old project of running a shared currency.

Greek officials won verbal support from EU leaders, but also said they would not rule out IMF help. The IMF is already offering advice, but European Union officials have said an IMF bailout is not needed.

"Obviously we would like EU solidarity and whatever support there would be to come from within the eurozone. But we cannot responsibly say that the IMF option - as much as we do not want it - can be ruled out," Finance Minister George Papaconstantinou said.

"It's not a threat. It's a responsible position for a (government) in the month of March, which has the borrowing needs that it has and with the spreads that it has.

Analysts say IMF intervention is opposed for political reasons - not least because IMF head Dominique Strauss-Kahn is a potential election opponent for French President Sarkozy, who could be reluctant to see him as the rescuer of the euro.

The measures contain ?2.4 billion (US$3.3 billion) in new revenues such as taxes and another ?2.4 billion in spending cuts. They include cuts in civil servants' salaries, pension freezes, increasing sales tax, or VAT, from 19 per cent to 21 per cent and hiking taxes on alcohol, cigarettes, luxury cars, yachts, precious stones and leather goods among others.

- AP