£4 billion cuts buy time for Greece

Greece unveiled fresh spending cuts of more than £4 billion which it hopes will buy more time to find a way out of its economic mess.

Plans include increasing VAT to 21 per cent and reducing bonuses for civil servants.

Prime Minister George Papandreou – who has said the country is in a "state of war" fighting for its national survival – hopes the measures will give his government breathing space to borrow an expected 4.5 billion from the bond markets over the next few days.

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The measures – which were backed by the European Commission later – appeared to have received early support from the markets.

Greece has about 18 billion in debt due to be paid in April and May so the government will have to tap the markets for more cash and for that, firmer pledges of support from other eurozone countries are still likely to be required, said Ben May, European economist at Capital Economics.

"The Greek PM's meeting with (German Chancellor) Angela Merkel on Friday could be crucial," he added. Mr Papandreou is to travel to Paris to meet French President Nicolas Sarkozy on Sunday after his visit to Berlin.

Government officials said the measures would save the government 4 billion.

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They said the measures would include cuts in civil servant's annual pay through reducing their Easter, Christmas and holiday bonuses by 30 per cent each, and a two per cent increase in VAT.

The new austerity package comes after European Union officials told Athens to make deeper spending cuts. Ratings agencies have also warned of more damaging downgrades if Greece is unable to rein in its debt.

Mr Papandreou said all Greeks would have to accept painful sacrifices, and he warned of "catastrophic" consequences unless the country can borrow on international markets at lower lending rates.

Greeks have their annual salaries split into 14 monthly instalments, with the last two considered holiday bonuses. Unions have said abolishing the 14th salary would be tantamount to a "declaration of war".

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Panayiotis Vavouyios, the head of the retired civil servants'

association, said: "It is a very difficult day for us... These cuts will take us to the brink.

"Brussels is demanding cuts and the government is doing nothing to stop them. To make poor pensioners pay for this crisis is a disgrace."

About 200 retired workers protested in central Athens yesterday, scuffling with riot police and breaking through a police cordon to get to Mr Papandreou's office and official residence, where they stood outside chanting "Money for the rich, but none for us!"

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Greece wants EU help to borrow money at lower rates, but European officials have remained silent over any potential bail-out plan,

insisting Athens must first improve its finances.

Greece's financial crisis has severely shaken confidence in the euro. It has also led to market expectations of some sort of bail-out led by the German and French governments. The Greek national debt has reached 272 billion. Greece plans to borrow 49 billion through sovereign debt issues this year.

Athens has promised to reduce its budget deficit from 12.7 per cent of gross domestic product in 2009 to 8.7 per cent this year but many economists consider that goal unrealistic.

The European Central Bank and International Monetary Fund are helping the EU assess Greek finances after Athens revealed a major budget shortfall last year and was accused of issuing misleading financial data for years.

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