Greek Economy to Shrink More Than Expected Next Year

By STELIOS BOURAS

The Wall Street Journal

ATHENS—Greece's economy will contract more than projected in 2013, its sixth year of recession, under the weight of the next round of austerity measures demanded by international creditors, according to a draft budget the government will submit to parliament Monday, two senior officials said.

The Greek government sees the economy contracting at an annual rate of 3.8% next year, a senior government official said, in line with private-sector economists' expectations and suggesting that earlier forecasts from Greece's international creditors were overly optimistic.

In the spring, the European Commission, which backs Greece's bailout along with the International Monetary Fund, estimated a zero growth rate for the country next year, suggesting it would be poised for a modest recovery after its depression-era-like contraction.

The budget will also include a large chunk of the €13.5 billion ($17.36 billion) in required spending cuts and revenue measures that international inspectors will assess Monday as they resume meetings with Greek government officials on steps needed to open the way for the country's next aid tranche from its second €173 billion bailout.

"Cuts of some €7.8 billion will be included in the budget on items such as government operating expenditures," said an official from one of the parties involved in the coalition government.

Next year's forecast recession is milder than the 7% contraction that Greece's economy is expected to show for 2012 but will extend the country's economic pain as unemployment rates hit records and business bankruptcies soar.

Inspectors from the European Commission, the IMF and the ECB, also known as the troika, are to return to Athens Monday after a 10-day break. They are to meet with Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras to weigh the austerity package finalized by Greece's three coalition party leaders last week.

The latest package includes €10.5 billion in spending cuts and €3 billion in higher taxes, according to government officials. Of the spending cuts, €6.7 billion will come from pensions and public-sector salaries and bonuses, while an additional €3.8 billion will come from government operating expenses.

The spending cuts in the package envision raising Greece's retirement age to 67 from 65 currently; cutting two extra-month bonuses now paid to public servants and retirees; cutting wages to uniformed personnel by 12% on average; cutting pensions above €1,000 a month by as much as 10%; and reducing other supplemental pensions.

Conservatives New Democracy, socialists Pasok and the small Democratic Left party managed to agree on the measures last Thursday after weeks of haggling on how to meet deficit reduction targets and in the process creating several rifts within the fragile coalition. Any objections to the mix from the troika could send the coalition partners back to the drawing board at a time when public opposition to the measures is growing.

Last week, tens of thousands of Greeks marched in central Athens to protest the measures, while Greek power workers have announced plans to begin rolling 48-hour strikes starting as soon as Monday.

The inspectors will review cuts and other measures to determine whether Greece should receive its next aid tranche of €31.5 billion. The country needs the funds to recapitalize its undercapitalized banking sector, to pay off government arrears and to help meet central government running expenses.

The inspectors' report, to be delivered before an Oct. 8 meeting of euro-zone finance ministers, will also play a key role in determining whether Greece is able to win a sought-after two-year extension in meeting its deficit targets.

Greece hopes that by securing a deal on the fresh budget cuts, it will be able to push ahead with a demand to extend the implementation of its bailout program by another two years in an effort to ease the pain of austerity measures on the recession-ravaged economy.

Write to Stelios Bouras at stelios.bouras@dowjones.com