News : Greece agrees to new Austerity
Greece stepped back from the edge of a default after agreeing to a package of austerity measures.
Eurozone ministers told the Greek government that it must make further budget cuts of €325 million, including 15,000 public sector job cuts, relaxing of labour laws, reducing the minimum wage by 20 per cent to €600 per month and negotiating a debt write-off with banks.
Greece needs €130 billion worth of bail-out funds before the deadline on 20 March. If it cannot make the payment, it will default and, in effect, become bankrupt.
The new package, which was carried by 199 in favour to 74 against, will now be presented at a meeting in Brussels today before bail-out funds can be released.
'When you have to choose between bad and worse, you will pick what is bad to avoid what is worse,' said finance minister Evangelos Venizelos.
However, the bond contract provides a seven-day grace period for the repayment of principal. In other words, Greece could delay paying bondholders until 27 March without technically defaulting.
Reports last week suggest that the latest official forecasts imply that the Greek debt-to-GDP ratio would only fall to 136 per cent by 2020, implying that Greece may need to reduce public debt by a further €35 billion to satisfy International Monetary Fund (IMF) demands.
Meanwhile, with €1.9 trillion in outstanding debt, Italy's debt burden is greater than Greece, Portugal and Spain combined. With the potential contagion fear, it comes as no surprise that Italian Prime Minister Mario Monti urged the IMF last week to be more lenient with Athens in bailout talks to prevent 'a big potential explosion'.
While he welcomed the IMF's insistence that Europe erect a strong firewall to prevent debt contagion from spreading, he also said the fund should not be too rigid in how it applies its lending requirements.
On his visit to the US, where he met President Obama, he highlighted that his new government had already seen positive results from a €30 billion austerity package introduced last year in the midst of a political and budgetary crisis, and that the drop in Italian bond yields since then was a sign of greater market confidence in the country.