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Greece Seeks Two-Year Austerity Extension

Kerin Hope in Athens
Tuesday, 14 Aug 2012 | 11:32 PM ET

Greece is seeking a two-year extension of its latest austerity program aimed at improving the country’s debt sustainability and prospects for a return to growth, according to a document obtained by the Financial Times.

A European Union flag, left, hangs beside a Greek national flag beneath the Parthenon temple on Acropolis hill in Athens, Greece.
Simon Dawson | Bloomberg | Getty Images
A European Union flag, left, hangs beside a Greek national flag beneath the Parthenon temple on Acropolis hill in Athens, Greece.

Antonis Samaras, the centre-right prime minister, is expected to outline the proposal during talks next week with Angela Merkel, German chancellor, in Berlin and French President François Hollande in Paris.

It comes as Greece struggles to find another €11.5bn of spending cuts – equivalent to about 5 per cent of national output – to be implemented in 2013 and 2014 under the current bailout deal with the European Union and International Monetary Fund.

The extension plan calls for a slower adjustment with cuts spread over four years until 2016, and the budget deficit declining annually by 1.5 percentage points of national output rather than 2.5 points under the present arrangement.

According to the document, Greece would need additional funding of €20bn to support the budget as the annual deficit reduction in 2013-2014 would be smaller than planned. However, Athens is proposing to find the money without seeking help from eurozone partners.

Funds would be raised from an existing IMF loan, issues of treasury bills and, Greece hopes, a postponement in the start of repayments of its first EU-IMF loan from 2016 until 2020, when it is due to begin paying back its second bailout loan.

The patience of Greece’s eurozone creditors is wearing thin and another stand-off between Athens and Berlin would be likely to destabilize financial markets further. German officials have ruled out any additional loans to Athens and a growing number of German politicians are now openly contemplating the country’s exit from the eurozone.

Iannis Mourmouras, chief economic adviser to the premier, said that a deeper than projected recession this year with the economy set to shrink by 7 per cent would justify the extension.

“The deficit reduction demanded for the period 2013-2014 is excessive,” Mr Mourmouras said. “An overdose of austerity is self-defeating.”

Greece’s economy contracted by annualized 6.2 per cent in the second quarter.

The eurozone as a whole shrank by 0.2 per cent, according to data issued on Tuesday, in spite of surprising resilience in Germany, which expanded by 0.3 per cent on the previous three months, and flat output in France.

Nonetheless, falls in business confidence and investment and a slowdown in global markets suggests conditions may weaken further, adding to the eurozone’s debt woes.

Mr Samaras came to power at a general election in June, pledging he would renegotiate the terms of Greece’s €174bn bailout agreed in February. But he decided to wait until his coalition government could show progress with getting fiscal and structural reforms back on track.

Greece has set a deadline of August 20 to finalize the new package, but disputes with leftwing coalition partners over pensions and wage cuts have delayed its completion.

International lenders have delayed the disbursement of a €31.2bn loan tranche until Greece gets reforms back on track, leaving the cash-strapped government struggling to meet its commitments.

The government debt agency on Tuesday raised €4.06bn of budget funds in three month treasury bills in a last-minute auction to cover a bond redemption due on August 20. Greek banks bought the bulk of the issue.

The European Central Bank had rejected a government proposal to delay the €3.2bn bond repayment by one month, highlighting the tough approach being taken to Greece by international lenders.

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