Europe continued to struggle with its own self-destruction overnight . The Greek government has now announced its additional spending cut plan:
Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default.
Measures announced late today following two rounds of talks with the European Union and the International Monetary Fund include: a 20 percent cut in pensions of more than 1,200 euros ($1,650) a month, according to a government statement; pensions paid to those younger than 55 will be shaved by 40 percent for the amount exceeding 1,000 euros and wages will be lowered for 30,000 state employees.
The policies were demanded by international lenders to ensure Greece reach deficit-reduction targets in a 110 billion- euro ($151 billion) bailout and receive a payment due next month.
“The risk is that the system, the financial sector and the real economy stop functioning” without the infusion, Finance Minister Evangelos Venizelos told Parliament in Athens today before Papandreou convened his inner Cabinet to complete the cuts.
Greek unions are planning a 3-hour work stoppage today and also have organised for two days of strikes on October 5 and October 19. Obviously at this stage that will be of no consequence as Greece only has two choices. Default now or comply with whatever demands are made no matter how counterproductive to economic recovery they are.
While Greece struggles with its suicide pact, the IMF once again warned that the European banking system is totally under-capitalised and unprepared for a crisis:
The International Monetary Fund is warning the euro zone debt crisis has left the region’s banks vulnerable and they will need to urgently raise around 300 billion euros in fresh capital to cover potential losses.
In its Global Financial Stability Report, the IMF said this is a worldwide problem but European banks are particularly weak and as many as 15 lenders could fail.
The report did not measure bank capital needs, which theIMF said would have to be determined by fully fledged stress tests to identify balance sheet assets, income or losses.
Earlier this month, IMF Managing Director Christine Lagarde drew fire from European officials when she called for a mandatory recapitalisation of Europe’s banks.
News reports last month said the IMF had identified a 200 billion euro shortfall in European bank capital, but officials in Europe insisted the figure was off the mark and the capital position of most banks in the region was solid.
European officials stood by bank stress tests they conducted in July that found only eight banks deficient in capital with a combined shortfall of only 2.5 billion euros, a figure widely criticised as too low and politically skewed.
The IMF’s report on Wednesday made clear the 200 billion figure was not a hard measure of a capital shortfall. Instead, it measured how risk exposure had increased as sovereign debt prices had fallen.
It said a further 100 billion euro increase in exposure was related to a recent decline in bank asset prices and rise in bank funding costs. The report said banks should raise capital privately although public funds may be necessary for viable banks.
Lagarde had said Europe might need to consider tapping its sovereign debt bailout fund to bolster banks.
In other news S&P cut the ratings of 7 Italian banks and put 15 more on negative outlook, that included UniCredit Italy’s largest bank. Portugal, like Greece yesterday, managed to sell off some short term bonds, but again at higher yields. The ECB has announced some adjustments to its debt instrument eligibility requirements which have raised a few eyebrows, however I note that they don’t come into force until January next year. And finally Angela Merkel and Greek PM George Papandreou have agreed to meet next Tuesday in Berlin face to face. Surely that is worth at least 300 points on the DOW given we were getting 100 points out of a phone call last week!
I also just noticed an article on FT with the title “Spain, not Greece, may be biggest eurozone threat” which is well worth a read, even if just to remind yourself that Greece is simply the country that got here first. There are much larger economies heading in exactly the same direction with exactly the same macro-economic problems.