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New measures, new cuts and a new rescue programme

31 March 2012 / 16:03:28  GRReporter
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Prime Minister Lucas Papademos left the possibility open for the new government, which will be announced after the next elections, to further reduce pensions and salaries. However, he expressed his optimism that the Greek economy will return on the path of growth in 2013.

"We cannot make promises. This is an issue to be resolved by the next government and the Greek Parliament, taking into account the latest data and prospects of the Greek economy ", answered the Prime Minister to a question by the leader of the far-right party LAOS, George Karadzaferis, who asked Papademos to make a promise that there won’t be a further reduction in pensions and salaries.

Papademos also explained that even after the debt restructuring, the adaptation procedure of the Greek economy will lead to a short-term reduction in income and increase in unemployment.

Papademos noted that over the next two years under the new economic programme, public spending will have to be cut by 12 billion Euros, and explained that at this stage, it is impossible to give more information about the way the reduction of these costs will be done.

The first signs

In relation to the economic development Papademos admitted that this year the recession will continue, the rate of unemployment will probably increase even further and "the real economy will remain weak throughout most of 2013." He added, however, that during 2013 the first signs of recovery in the real economy ar expected.

"With the implementation of the new economic programme, the introduction of various regulations and the application of measures, the goal of the government in the coming years is to gradually stabilize the Greek economy and to initiate its recovery", said Papademos and added:

"It is difficult to predict the future precisely, but all estimates and forecasts made by both international agencies and private analysts indicate that the implementation of these measures and reforms, improving competitiveness and restoring confidence, will create conditions for stability and economic recovery."

The insurance system

When asked by Karadzaferis how the losses from insurance funds will be compensated, the Prime Minister replied that it is not likely that bank stocks, which the public sector will receive after the recapitalization, will be provided to the Funds. "As already known, these stocks will be included in the Greek Fund for Financial Stability ", Papademos said, adding that after the completion of all procedures under the PSI and the relevant research is done, the government will be able to make a final decision on "how the insurance funds will be supported and with what means."

Papademos also clarified that securing funds "cannot be based on assistance from the state”, but on the new security system reform, on new regulations and control for reducing costs, rationalization of benefits and integration of health care funds for additional insurance.

In response to Karadzaferis’ criticism, the Prime Minister said that "the major problems of insurance funds are not due to the PSI”. On the contrary, as he said, the state participation in financing the insurance system is much greater than the assets of insurance funds, amounting to 26 billion Euros before the PSI.

A new package of economic aid

The Prime Minister did not exclude the possibility that Greece will need a new package of economic aid, expressing hesitation about when the country will return to the financial markets, in spite of the PSI.

In an interview for the Italian newspaper “II Sole 24 Ore”, Lucas Papademos said that the country is making every effort to avoid a third rescue package but does not exclude the possibility that eventually the country will need one.

"Maybe we will need some kind of financial assistance but we must work hard to avoid such a possibility", said the Greek Prime Minister, and thus reinforced the concerns expressed by International Monetary Fund officials in the Eurozone and market analysts.

Papademos stressed that Greece may find itself in a position where it will not have access to the markets, even if all the agreed measures are fully implemented.

"It is difficult to foresee market conditions and expectations for 2015", he said, stressing that if Greece leaves the Eurozone, the consequences will be catastrophic.

“A possible return to the Drachma would lead to high inflation, currency instability and reduction of the actual value of bank deposits", said Papademos.

When asked whether the worst is in the past, the Greek Prime Minister replied negatively. "The real economy is still weak and it is very likely that high unemployment rates will continue in the near future. The difficult period awaiting us must be greeted with great care", said Papademos.

The International Monetary Fund provides for extension of the financial assistance

A report of the International Monetary Fund, which was published recently, provides for the extension of the financial aid programme for Greece until after 2014, when the second rescue package expires.

The report mentions that the financial vacuum in Greece for the period from 2015 onwards, is set at 32 to 67 billion Euros, in spite of the remission of debt, which amounts to 100 billion Euros and the new loan agreement, which amounts to 165.4 billion Euros.

The International Monetary Fund stressed that the high debt and strict austerity measures adversely affect the Greek economy and many economists wonder whether Athens is on the verge of reform "fatigue."

In this regard, the International Monetary Fund has developed an alternative scenario, which envisages a three-year delay of the required financial reforms and the ability to sell state assets at a slower pace than the one envisaged. According to this more negative scenario, between 2015 and 2020 the financial vacuum in Greece could reach 67 billion Euros.

In this case, the ratio of the Greek debt to GDP will swell to 171 percent in 2014 instead of the 160 percent provided for in the baseline scenario of the International Monetary Fund. In 2020 the debt will reach 146 percent of GDP, instead of the 117 percent provided for in the optimistic scenario.

Tags: Lucas Papademos LAOS Greece economy crisis banks insurance funds IMF
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