Greece Proposes Spending Cuts, but Will They Be Enough?

NEWS ANALYSIS

ATHENS -- Greece was heading for bankruptcy last year. It still is today, only now, its chances of fiscal recovery look bleaker, pundits and market analysts predict.

The reasons? Half-baked fiscal reforms, shortfalls in revenue and a state debt expected to explode to over 160 percent of its gross domestic product by 2013.

This week alone the cost of insuring Greek government debt against default was so worrying that it hit a record on speculation that the Athens government was priming for a debt restructuring plan, the first by a Western state in 60 years.

What's more, investors began dumping the euro over fears that Europe's debt crisis will worsen as Greece struggles to avoid a debt makeover.

To soothe skittish investors, Greek Prime Minister George Papandreou unveiled plans today to slash state spending to 44 percent of the gross domestic product by 2015, from 53 percent in 2009, and boost revenues from 38 percent in 2009 to 43 percent in 2015.

However ambitious, Papandreou's 30-minute televised address fell well short of what investors and analysts anticipated: the details of a $32 billion deficit-cutting plan.

"That was it?" quipped Yannis Lyxourgiotis, a professor of labor law. "I was hoping to hear something more."

So, too, were the markets. The government's delay in releasing details pushed the Athens Stock Exchange down by more than 1.4 percent, after early gains ahead of Papandreou's remarks.

Earlier, government spokesman George Petalotis told reporters that the measures, which Papandreou said would be fleshed out in the coming weeks, were intended to "send a message to markets saying that Greece has credibility; that it has a plan and a prospect that guarantee it can meet its targets."

Elected in late 2009, the socialist government surged to power, but shocked world markets with revelations that Athens had under-reported the size of a budget deficit that reached 15.4 percent that year, five times the rate allowed under Europe's single-currency rules.

To stave off bankruptcy, Greece's European partners and the International Monetary Fund cast Athens a $146 billion financial lifeline in exchange for sweeping budget cuts and commitments that it would take an ax to widespread waste and enact reforms to root out corruption and deep-seated structural flaws in the economy.

"No one said this rescue plan was going to be easy," Yiorgos Kirtsos, an economist and political commentator, told AOL News. "But a year later, this foreign-made recipe for recovery has proven to be bad for Greece, and the government ineffective in managing this crisis.

"We're worse off now than before," Kirtsos said.

Despite progress in cutting the deficit nearly six percentage points, raising retirement ages and slashing holiday pay and unjustified entitlements, Greece's reforming zeal has faded. Tax collection has been ailing. Privatization of state enterprises is lacking. And much-vaunted labor reforms intended to open more than 150 cosseted professions have been watered down, significantly.

Worst yet, though, for a country heavily reliant on public spending for decades, the austerity program has dampened growth, sinking Greece into deep recession Unemployment figures released earlier this week showed the country's jobless rate had climbed to a record 15.1 percent.

With the country's creditworthiness increasingly in doubt, debate has soared over whether Greece should restructure its debt. Athens and a number of European policymakers have ruled out the move, saying it would prove catastrophic for European banks and the 17-nation eurozone.

But earlier this week, Germany's finance minister said Greece's failing fiscal performance may require further steps, including a negotiation of its debt.

"Even if the debt disappeared with the touch of a magic wand," Papandreou said during the televised meeting of his cabinet group, "Greece will once again be faced with a massive debt if deep-seated reforms do not take place.

"Restructuring the debt isn't the key; it's restructuring Greece altogether and rooting out a mind-set and practices that led us to this point in the first place," he said.

Details of the $32 billion plan will be reviewed by Greece's international creditors before it goes for a vote in the 300-seat parliament in mid-May.