Markets give Greek deficit plan thumbs down

People walk in central Athens December 14, 2009. Greek Prime Minister George Papandreou will outline economic policies late on Monday, aiming to reassure markets and EU partners demanding specific ways to cut deficits threatening to sink the euro zone's weakest member.

ATHENS (Reuters) - Financial markets gave Greek Prime Minister George Papandreou's emergency deficit-cutting plan a thumbs-down on Tuesday, selling Greek debt and bank shares as workers launched protests against planned austerity.

The risk premium on 10-year government bonds jumped to 257 basis points above benchmark German bonds from 231 on Monday after the Socialist leader outlined his plan to slash the huge budget shortfall by curbing welfare spending and raising taxes.

The Athens stock exchange was 1.41 percent down in early trade and bank shares fell as much as 2.9 percent. Analysts said the economy needed much more potent medicine.

"The measures announced by the prime minister yesterday were not deemed sufficient, so many market players decided to sell stocks," said Constantinos Vergos, head analyst at Cyclos Securities. "We expect selling to continue over the next two to three days".

Finance Minister George Papaconstantinou said it may take time to restore confidence.

"The implementation of these measures over the next few months will be what will convince markets that there is a very serious effort to reduce the deficit," Papaconstantinou told reporters.

Euro zone leaders and most bank analysts say there is no prospect of Greece defaulting on its debt, however. The cost of insuring Greek government debt against default or restructuring inched higher on Tuesday, but it stayed below last week's peak.

Greece plunged into crisis last week when Fitch Ratings cut the country's sovereign credit rating to below A grade, the lowest in the euro zone, for the first time in a decade. A team from Moody's rating agency, which has Greece's outlook on negative watch, was in Athens on Tuesday to meet government officials.

European Union peers and credit ratings agencies had pressed Greece to imitate fellow euro zone struggler Ireland by cutting public sector pay and welfare benefits to reverse a deficit set to hit 12.7 percent of gross domestic product this year.

Instead, Papandreou announced a crackdown on corruption and tax evasion, a reduction in the layers of government, social security spending cuts, a freeze on state salaries above 2,000 euros a month and a 90 percent tax on private bankers' bonuses. But he stuck to a promise to increase real wages for lower-paid public sector workers.

Even that was too much for some trade unionists in a country with a tradition of labour militancy and political unrest, with protesters blocking the Finance Ministry entrance on Tuesday.

"SYMBOLIC RESPONSE"

The European Commission, in a cautious response, called the plan a step in the right direction but said concrete measures for a quick consolidation of public finances need to be spelled out in a detailed stability programme next month.

The president of Germany's Ifo institute said the euro zone would not break up due to Greece's debt, forecast to hit 135 percent of GDP in 2011 barring policy changes. But Hans-Werner Sinn said Greece could become "the next Lehman Brothers", the U.S. investment bank whose bankruptcy in Sept. 2008 triggered global financial turmoil.

Members of the Greek communist workers group PAME blocked the entrance of the Finance Ministry for four hours on Tuesday and unfurled a banner from its rooftop, reading: "Rise! The government and plutocracy are dismantling social security".

"This is a symbolic response to Papandreou's statements," said PAME official Christos Katsotas. "They bring nothing but poverty." PAME is organising a nationwide strike for Thursday.

Political analysts said the major labour unions were also likely to mobilise members to fight the government's measures.

The contrasting reactions highlighted the tightrope walk facing Papandreou, elected in October promising to tax the rich and help the poor, as he tries to calm markets worried about Greece's creditworthiness and catering to a restive public.

Economists forecast more turbulence for Greek markets and questioned the credibility of some of the proposed savings to cut the deficit to the EU limit of 3 percent of GDP in 2013.

"The measures so far announced to reach those goals still look less than water-tight, with a one-off levy on some companies and much emphasis on 'efficiency savings'," said Jonathan Loynes, chief European economist at Capital Economics.

"Meanwhile, the prime minister said last night that public sector workers would receive real wage increases next year -- hardly a sign of serious fiscal restraint."

Costas Panagopoulos, an opinion pollster with Alco, said any trade union backlash should not prevent the government from enforcing the cuts.

"There will be reactions. Groups with vested interests will react, if for example, state workers' supplemental, top-up salaries will be cut. But I do not expect reactions to be so strong as to prevent the measures announced yesterday from being implemented," Panagopoulos said.

(For a BreakingViews column on Greece, click on [nLDE5BE0KQ])

(Additional reporting by Renee Maltezou and Angeliki Koutantou; Writing by Dina Kyriakidou and Paul Taylor; Editing by Hugh Lawson)

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