October 16, 2009 / 3:53 PM / 10 years ago

UPDATE 1-New Greek PM Papandreou says economy "explosive"

* Greek PM says economy in “explosive” situation

* Deficits and debt must be cut

* Need to restore confidence of EU and markets in Greece

(Updates with more quotes, background)

By Dina Kyriakidou

ATHENS, Oct 16 (Reuters) - Greece’s newly elected Prime Minister George Papandreou said on Friday the economic situation in the euro zone’s weakest link was “explosive”, requiring spending cuts to plug big budget holes.

Papandreou, whose socialists won Oct. 4 elections pledging to tax the rich and support the poor, as well as a stimulus package for the slowing economy, said restoring Greece’s credibility was a top priority.

“The Greek people trusted us to govern at one of the most critical moments in Greece’s history,” he told parliament as he outlined his main policy ahead of a confidence vote on Sunday. “The situation of our economy is explosive.” Burdened with the euro zone’s second heaviest debt-to-GDP ratio after Italy, Greece has seen its economy turn negative after years of boom, with unemployment rising and social unrest gripping its urban centres.

Papandreou said he would keep pre-election promises of above-inflation pay rises and a freeze on utility prices for 2010 but made clear spending cuts would have to be made.

“Today we face an unprecedented fiscal derailment,” he said. “The deficit must be cut and we must start containing the public debt.”

With a comfortable majority of 160 seats out of 300 in parliament, Papandreou is sure to win Sunday’s confidence vote.

BUDGET DEFICITS GROW

New Finance Minister George Papaconstantinou told Reuters in an interview earlier on Friday the budget deficit was expected to top 10 percent of GDP this year, well over the 3 percent EU limit, and more borrowing will be needed to meet obligations. [ID:nLG196013]

A chronic budget deficit offender, Greece will find little sympathy in Brussels, where it will submit a 3-year plan outlining fiscal consolidation and structural measures.

Papandreou blamed the outgoing conservatives, ousted after five years in power due to scandals and the economic slowdown, for plunging Greece into its worst economic situation since 1993, the last time it suffered a recession.

He said transparency and drastic limiting of waste in the public sector would help fiscal consolidation. “We are in an emergency situation, everyone must understand that. There will need to be spending cuts at every ministry,” he said.

Papandreou admitted Greece’s international standing had been hurt by unreliable figures and failure to meet targets and promised to follow a policy of dialogue.

“Our first immediate goal is to restore the confidence of our European partners and international markets in our country. The blow we have suffered is great and negotiations with the EU will be hard,” he said.

“But we are not afraid,” he added. “We have the will and the programme to win back our country’s credibility.”

He promised that 20 percent of energy production would be green by 2020, a target Greece is far from achieving.

“Green growth is the passage to a new age of new technologies, with thousands of new ‘green jobs’ with decent salaries. It is the development model for our country that will bring wealth that will be equally distributed,” he said.

He promised increased spending on education, health, research and the public investment programme.

“We face a four-year term that will not be easy but we want it to be productive and creative for all Greeks,” he said. (Editing by Andrew Roche)

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