Greece Looks for More Budget Cuts

September 20, 2012, 10:37 AM

The Wall Street Journal

By Alkman Granitsas

As Greece’s coalition leaders meet Thursday on what is likely to be their penultimate meeting before signing off on billions of euros worth of budget cuts demanded by the troika (another meeting may come Sunday), the countdown clock is ticking loudly in Athens.

For Greece to secure the next tranche of a promised €173 billion ($224 billion) aid package from lenders, it must agree to the cutbacks — and vote for them in parliament – within the next ten days. The goal is to show creditors – in time for next month’s Oct. 8 meeting of euro-zone finance ministers and the Oct. 18 summit of European leaders – that Greece is picking up the pace of its delayed reform program and deserves another dollop of aid.

That next aid tranche, worth €31 billion, is particularly key. At stake, is whether Greece’s slightly wobbly coalition government can buy enough time with that money to appease growing public anger over the cutbacks even as it pursues difficult reforms.

The thinking inside government circles is that the money will provide a temporary relief to Greece’s recession-ravaged and liquidity-starved economy. More than three-quarters of it will go to recapitalizing Greece’s technically insolvent banks so they can start lending again. Several billions of euros more are earmarked for paying off government arrears to contractors, something that should help kick start several key infrastructure projects that have now been frozen due to a lack of cash.

No one expects Greece’s economy — now in its fifth year of recession — to turn around anytime soon. But the liquidity boost could help ease some of the strains and give crisis-weary Greeks just a bit of hope — at least long enough for a real recovery (not expected until 2014 at the earliest) to set in. If not, anger on the streets of Athens is likely to continue growing.

As it is, it is already growing over the latest cutbacks. A mass transit strike brought the Greek capital, Athens, to a standstill Thursday; a nationwide general strike is planned for next Wednesday. If public anger continues to swell – and many expect that it will – Greece’s uneasy coalition of conservatives, socialists and leftists may see their reform efforts flounder in the face of public opposition. The same fate doomed its predecessor government.

Few analysts expect the coalition government—widely seen as Greece’s last chance at surviving inside the euro zone — to last more than a year. Whether it does — and how successful its reform efforts will be — will depend on what it does in the next few months and starting from today. The countdown clock has already started ticking.