Greece Eyes Fresh Cuts as Default Fears Grow

The Wall Strreet Journal

By ALKMAN GRANITSAS And STELIOS BOURAS

ATHENS—Greece will announce the closure of several state-linked organizations this week and make further spending cuts in its 2012 budget, the finance minister said Monday, as the government scrambles to meet conditions for a fresh infusion of aid.

"We will publish this week decisions on the restructuring of public bodies," Finance Minister Evangelos Venizelos told a business conference. "In light of the new budget, it is clear that our emphasis will be on the spending side."

Mr. Venizelos spoke ahead of a conference call with inspectors from the country's troika of creditors—the European Commission, the International Monetary Fund and the European Central Bank—to assess Greece's progress in meeting its budget goals. That call is expected to take place at 1600 GMT (1200 ET), after which the Greek government plans to hold another ministerial meeting to decide on fresh measures.

Greece's international creditors have turned up the pressure after abruptly suspending aid talks this month when it appeared the government would overshoot its budget deficit target for this year. At a weekend meeting of European finance ministers in Poland, officials warned that Greece may not receive an €8 billion ($11.04 billion) aid tranche in October if it fails to bring its budget back in line with targets. Without that aid, Greece will run out of cash by mid-October.

Those warnings prompted Greek Prime Minister George Papandreou to abort a trip to New York and Washington this week and to call an emergency cabinet meeting Sunday to plan new measures. The warnings also raised concerns in the market that a Greek debt default could be imminent.

The euro sank at the start of Asian trading hours and the cost of insuring European corporate and sovereign debt against default using credit default swaps continued to rise significantly Monday as Greek debt worries intensified.

"Investors are concerned that the additional policy steps needed may not be agreed on time. In turn, fears that Greece could run out of money in coming weeks continue to weigh on euro sentiment," Citigroup said in a note to clients.

ECB Governing Council member Jens Weidmann said Monday that there would be "unpleasant" consequences should Greece not get further international aid because of failing to fulfill the terms of its rescue package. "One must know that that will certainly be a relatively unpleasant scenario, not only for Greece, but also for other participants," the head of the Deutsche Bundesbank warned, while addressing the German parliament's budget committee.

But he didn't rule out such a scenario. "If the [reform] program is, however, not implemented, then the basis for further payments also is dropped," he said.

Greece is due to submit its 2012 draft budget to parliament on the first Monday in October, as foreseen by the Greek constitution. The plan will be voted on by the end of October under expedited procedures. Under normal parliamentary rules, the vote usually takes place at the end of December.

A senior IMF official, speaking at the same conference as Mr. Venizelos Monday, urged more Greek cuts, particularly in the public sector.

"Additional measures will need to be taken for the deficit to be reduced to sustainable levels," said Bob Traa, IMF senior representative for Greece.

According to Greek government officials, the troika is pressing Greece to cut 100,000 public jobs by 2015, either through outright layoffs or by placing some of those workers in a special labor reserve. Workers on reserve would be retained on 60% salary for up to a year, but would face dismissal after that if no new jobs were found for them.

Greece might also have to consider retroactively—and with immediate effect—rescinding all public-sector hiring that took place in 2010 and 2011, Greek officials said. That could affect 25,000 or more workers, one official said.

The troika has asked Greece to consider raising taxes on tobacco, alcohol and luxury goods, while Athens is also under pressure to step up plans to close or merge dozens of public-sector bodies. Last week, the government announced a new property tax that, coming on top of other recent tax hikes, has met with rising public opposition. Combined with the public-sector cutbacks, some government officials fear those steps could provoke a new outburst of public protest and possibly new elections.

However, a European Commission spokesman said the EU isn't demanding more from Greece than what its government has already agreed to as part of the country's bailout program.

"We are not demanding more than what was agreed in the framework of the program for Greece," said spokesman Amadeu Altafaj Tardio. He added the commission never set a deadline for a resumption of the troika's lending review, which was suspended after a dispute over the slow pace of cutbacks and structural overhauls by Athens as it continues to fall behind budget targets.

—Costas Paris in London, Todd Buell in Frankfurt and Riva Froymovich in Brussels contributed to this article.

Write to Alkman Granitsas at alkman.granitsas@dowjones.com