December 14, 2009 / 9:43 PM / 10 years ago

WRAPUP 1-Greek PM pledges spending cuts, tax on bankers

* Social security spending to be cut 10 pct next year

* Will slap 90 pct tax on bankers’ bonuses

* But shies away from reducing public sector wages

* CDS rise, suggesting markets may not be satisfied

By Dina Kyriakidou

ATHENS, Dec 14 (Reuters) - Prime Minister George Papandreou, treading a tightrope between public opinion and impatient investors, announced spending cuts and a 90 percent tax on private bankers’ bonuses in an effort to rein in Greece’s debt.

“There are times in a nation’s history that define it for decades, for generations to come,” Papandreou said in an hour-long speech to unions and employers on Monday night. “This is such a time.”

But he shied away from the politically difficult step of cutting public sector wages, and in an initial sign that financial markets may not be satisfied, the cost of insuring Greece’s debt against default rose after he spoke.

“It’s clear he’s trying to get political consensus,” said Diego Iscaro of IHS Global Insight. “They are between a rock and a hard place...If the markets were really expecting concrete measures, then they might be disappointed.”

Papandreou, speaking before a nationwide strike planned by leftist parties on Thursday to protest against austerity measures, said he planned tax reforms that would make the wealthy carry more of Greece’s debt burden.

“Many of our choices will be painful,” he said. “I ask every Greek today to participate in the decisions.”

In one measure designed to please an angry public, Papandreou said he would abolish bonuses at state banks and slap a 90 percent tax on private bankers’ bonuses. He also vowed a fight against corruption and tax evasion, calling them the country’s biggest problems.

He announced a 10 percent cut in social security spending next year, a challenge for Greece’s ageing population, and promised to introduce a capital gains tax. (for a list of major budget measures announced on Monday, click [ID:nLDE5BD2E8])

MARKET REACTION

But instead of announcing reductions in public sector wages, as some other heavily indebted European governments have done, Papandreou said civil servants making less than 2,000 euros a month would get pay rises above inflation.

Financial markets’ initial reaction to his speech was moderately negative. Greek credit default swaps rose to around 222 basis points after the speech, according to CMA DataVision, from 209 bps beforehand.

Spreads between Greek and German bonds, which had widened to an 8-month record high earlier this month, expanded marginally in thin after-hours trade. The 10-year spread rose about 4 bps to 231 bps.

Credit rating agencies and Greece’s European Union partners have piled pressure on Papandreou’s goverment in the last several weeks. They want drastic measures to cut a budget deficit estimated at 12.7 percent of gross domestic product this year and public debt expected to hit 121 percent of GDP in 2010.

There was no immediate reaction to Papandreou’s speech from the European Union. Top German and French officials have said euro zone governments feel responsible for helping Greece overcome its problems, but they have stopped short of explicitly promising aid, insisting that Athens must reform its policies.

DOWNGRADE

Papandreou said Greece must take in three months the necessary decisions not taken in decades by previous administrations. He repeated that he intended to bring the budget deficit below 3 percent of GDP in four years, while the debt would begin to shrink after 2012.

Greek markets have taken a beating since Fitch downgraded Greece’s credit rating to a BBB+ for the first time in a decade last week, making Greece the only euro zone member to be rated below an A.

In the worst case, a loss of investor confidence in Greece could prevent it from continuing to borrow at affordable rates in the debt markets.

Papandreou won Oct. 4 elections pledging to tax the rich and help the poor, but he revealed soon after coming to power that Greece had in fact been in recession all year, and that its fiscal plight had been under-reported to the EU.

Pressed by the EU to follow the example of tough fiscal measures undertaken by Ireland, Papandreou assured EU leaders at a summit in Brussels last week that Greece was ready for hard decisions.

But political commentators believe it could take weeks or months for him to secure the wide domestic political backing needed for drastic steps such as a freeze on most public sector wages or sharp cuts in overtime pay in the public sector. (Additional reporting by Ingrid Melander in Athens and Daniel Bases in New York; Editing by Andrew Torchia)

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