Greece to tighten austerity as IMF warns on banks
Greece was set to outline more austerity measures on Wednesday to secure a bailout installment crucial to avoid running out of money next month, as the IMF warned that Europe's sovereign debt crisis risks tearing a giant hole in banks' capital.
The cabinet in Athens was meeting to consider major public sector layoffs, pay and pension cuts and tax increases sought by international lenders in return for an 8 billion euro rescue loan vital to pay state salaries and bills in October.
Greece is the front line in the euro zone debt crisis that has also engulfed Ireland and Portugal and now threatens Italy, Spain and some of Europe's biggest banks, risking plunging the West back into recession.
In its Global Financial Stability Report, the International Monetary Fund said the crisis had increased European banks' exposure by 300 billion euros and they needed to recapitalize to ensure they can weather potential losses.
Risks are elevated and time is running out to tackle vulnerabilities that threaten the global financial system and the ongoing economic recovery, the report said.
The global lender did not try to measure banks' capital needs. Europe-wide bank stress tests in July drew derision when they found only eight banks deficient in capital with a combined shortfall of just 2.5 billion euros.
Officials said European governments are now looking seriously at ways to shore up banks' capital after initially rejecting an IMF call last month for urgent action.
Fears of another credit crunch or recession due to Europe's inability to overcome the debt crisis have dominated the run-up to this week's IMF/World Bank and Group of 20 meetings of finance chiefs in Washington.
A Greek government spokesman said measures negotiated in tough talks with European Union and IMF officials would be announced in the afternoon after the special cabinet session.
After a summer lull in protests, Greece's two biggest labor unions said they would jointly stage 24-hour strikes on October 5 and October 19 to protest against the new measures required by international lenders.
We will fight to the end, to topple this policy, Ilias Iliopoulos, general Secretary of public sector union ADEDY, told Reuters on Wednesday. The troika (EU and IMF) and the government must go.
Finance Minister Evangelos Venizelos acknowledged before the meeting that Greece's public finances would have gone off the rails without checks by the so-called troika of EU/IMF inspectors, who walked out of Athens on September 3 after uncovering a new deficit shortfall.
If it weren't for the troika's control... unfortunately we would have derailed fiscally, Venizelos told lawmakers, adding that the country needed the help of international lenders, who have imposed a string of unpopular tax rises, pension cuts and economic reforms since they rescued the country in May 2010.
Venizelos had a two-hour conference call late on Tuesday with senior troika officials, who pushed Greece to accelerate its austerity and reform drive.
BUYING TIME
In a sign that a deal may be close, the European Commission announced after the call that troika mission chiefs would return to Athens early next week to complete their quarterly review of progress on Greece's adjustment program.
Diplomats and market analysts say Greece is likely to get the aid tranche, if only to buy time for European governments to recapitalize banks and strengthen the euro zone's rescue fund to cope with a probable default, perhaps early next year.
A Finance Ministry official said Venizelos had agreed to bring forward measures from the so-called mid-term plan, in which it has committed to slash its budget deficit through 2014 and sell some 50 billion euros in state assets.
Greek media reported the measures were likely to include accelerated sackings of state workers, pension and wage cuts for civil servants, increases in heating fuel tax and extension of a one-off property tax announced.
The government has so far said it will immediately put up to 3,000 public employees into a so-called labor reserve, in which they draw 60 percent of salary for a year while looking for another job. Another 20,000 would follow in a second wave.
Those who do not find a job within 12 months would be dismissed. The government estimates that putting people in the labor reserve saves about 12,000 euros per year per worker.
The measure is part of Greece's overall commitment to cut the civil service payroll by 150,000 employees by 2015 -- about 20 percent of the total. The troika wants layoffs speeded up.
BANK RECAPITALISATION
In another move to help banks avoid a potential credit crunch, the European Central Bank loosened its collateral rules on Wednesday to widen the pool of assets that banks can post to obtain central bank funds.
IMF chief economist Olivier Blanchard said European countries were warming to the idea that banks in the region need to boost their capital to withstand potential losses from the sovereign debt crisis.
If banks needing more capital are unable to raise more on financial markets then authorities might need to step in, although outright nationalizations are not necessary, Blanchard said in a French television interview.
Blanchard said he noted a clear change of tone at a weekend meeting of EU finance ministers and central bankers in Poland.
The position of most European countries is, yes, we have a problem, capital needs to be put into the banks, he told news channel France24. It seems to me there's been a 180-degree change in a lot of countries.
EU finance ministers agreed on Saturday that European banks must be strengthened in the follow-up to July stress tests as an EU report said a systemic crisis in sovereign debt now threatened a new credit crunch.
Barclays Capital said European banks may need some 230 billion euros to preserve a 6 percent core Tier 1 ratio in the extreme case of 50 percent haircuts on all sovereign debt of Greece, Ireland, Portugal, Italy and Spain, and the likely deep recession that would follow. The figure would be far smaller if only Greece were provisioned.
European banking shares have suffered steep falls in recent weeks on concerns about the sector's exposure to debt issued by Greece, with French banks suffering some of the biggest losses.
The head of Germany's number two lender, Commerzbank said the debt crisis was casting doubt on his bank's profit targets for this year, already softened last month.
August was certainly not a happy month for a lot of banks, Commerzbank CEU Martin Blessing told Frankfurt business journalists.
Blessing said euro zone leaders had bought time by setting up the EFSF rescue fund but they had so far failed to find a path out of the crisis. Investors were awaiting reliable answers, he said.
I believe we have reached a crossroads, Blessing said. If Europe wanted to save the single currency, it must move toward a fiscal union. A monetary union without a fiscal union, this construct has failed, he said.
(Additional reporting by Ingrid Melander and Dina Kyriakidou in Athens, Leigh Thomas in Paris, Jonathan Gould in Frankfurt,; Writing by Paul Taylor; editing by Janet McBride)
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