Greece announces $6.6 bn in budget cuts for EU support

Greek Prime Minister George Papandreou announced an additional 4.8 billion euros ($6.6 billion) of deficit cuts as he tries to convince European allies and investors that he can tame the region’s biggest budget gap.

The measures include higher tobacco, alcohol and sales taxes that seek to raise 2.4 billion euros in revenue, said Deputy Citizen Protection Minister Spyros Vougias after a Cabinet meeting in Athens to pass the plan. The government will also cut by 30 per cent three additional salary payments civil servants receive at holiday times, a move union leaders have already warned will spark new protests.

Greece is signing up to even greater austerity measures after EU leaders called for Papandreou to adopt additional cuts before allies would come to its aid. The announcement comes as Papandreou prepares to meet Germany’s Angela Merkel on March 5 and French President Nicolas Sarkozy on March 7 to discuss its financing woes. Greek bonds advanced for the fourth day on the prospect that the deficit measures might lead to EU help.

The measures, the second additional steps taken since Greece presented its original deficit-cutting plan to the European Commission on January 15, aim to insure that Greece makes good on its pledge to trim a deficit of 12.7 per cent of gross domestic product to 8.7 per cent this year.

Wednesday’s measures are the equivalent of 2 percentage points of GDP, about half Greece’s pledged deficit reduction for this year. The package includes raising the main value added tax to 21 per cent from 19 per cent and increasing alcohol and tobacco taxes for a second time this year. Civil servants will also see the reduction in benefit payments increased to 12 per cent from the 10 per cent in the original plan.

Greek bonds gained for a fourth day, with the yield on the benchmark 10-year bond falling 12 basis point to 6.03 per cent, the lowest since February 11. The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, fell 11 basis points to 2.93 per cent.

Concern about Greece’s ability to finance its debt pushed that premium to 396 basis points on January 28, the highest since the start of the euro in 1999, making it more expensive for the country to sell new bonds.

“If our country doesn’t manage to borrow with similar terms as is normal for a European Union country, then the consequences will be something more than catastrophic,” Papandreou said in a speech on Tuesday. “Our responsibility is to avoid this catastrophe.”