Greece slaps new tax on property to cut deficit

THESSALONIKI, Greece Mon Sep 12, 2011 2:44pm IST

A taxi driver holds a huge Greek flag during a protest outside the parliament in Athens' Syntagma (Constitution) square, July 26, 2011. REUTERS/John Kolesidis/Files

A taxi driver holds a huge Greek flag during a protest outside the parliament in Athens' Syntagma (Constitution) square, July 26, 2011.

Credit: Reuters/John Kolesidis/Files

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THESSALONIKI, Greece (Reuters) - Greece on Sunday slapped a new tax on real estate to plug a 2011 budget hole, please international lenders and secure a key new loan tranche as concerns mounted in Europe over its euro zone membership.

The European Commission welcomed the measure, just days before EU and IMF inspectors arrive in Athens to hear how the government plans to overcome delays and missed fiscal targets before approving an 8-billion-euro tranche from its 110-billion-euro bailout, key to Greece's survival.

Finance Minister Evangelos Venizelos said the cabinet agreed the measure to raise about 2 billion euros missing from the government's coffers and to meet the 2011 budget deficit target, estimated at around 8.1 percent of GDP.

"It's the only measure that can be applied immediately and produce results quickly because it does not depend on the tax-collecting mechanism," he told reporters, adding the levy would be collected through electricity bills.

The EU's Economic and Monetary Affairs Commissioner, Olli Rehn, said the levy would go far in meeting fiscal targets. Rehn said he expected the inspectors to complete their mission by the end of September.

"I welcome the expressed commitment by the Greek government to fully meet the agreed fiscal targets this year and next, and to take the necessary consolidation measures," Rehn said in a statement. "Greece needs to meet the agreed fiscal targets."

Responding to renewed talk in European capitals that Greece's will to comply with the bailout plan and stay in the euro bloc may be wavering, Prime Minister George Papandreou said his debt-ridden country was in the middle of a battle he was determined to win and ruled out snap elections.

"This is not the time for elections. This is the time for battle," he told a news conference after chairing the informal cabinet meeting in Thessaloniki. "This situation is similar to being in a war and asking the Greek people for money to buy weapons."

Papandreou admitted state mechanisms and entrenched unionist and other interests were hindering reforms but said the measures already announced would be enough for 2011 and 2012.

The government has already announced a "labour reserve" in the public sector, a way to eventually lay off civil servants who now have secured jobs for life.

Papandreou ruled out massive state firings, saying the civil service had already shrunk by about 100,000 people in the two years his socialist government has been in power.

Police fired tear gas to disperse violent anti-government demonstrators in the northern city of Thessaloniki on Saturday but the protest was smaller than many of those that often crippled Athens over the winter. Over 100 people were detained, police said.

The government's popularity has dwindled amid rising public discontent over continued austerity and the conservative New Democracy opposition now leads in opinion polls.

STRUCTURAL REFORMS NEEDED

Analysts said the property levy will most likely plug the budget hole for this year but fell short of demands for real change in the country after months of wavering and delays.

"This one-off measure does not address the structural issue," said a banking analyst who declined to be named. "International lenders will likely see it positively as far as the next tranche goes but Greece must send other signals -- structural reforms and trimming the public sector."

EU and IMF inspectors have repeatedly told Greece to avoid more economy-stifling tax measures and focus on structural reforms and spending cuts, including shrinking the large and inefficient state.

Papandreou said the tax, which will range from half a euro to 10 euros per square meter of construction and will be in effect for two years, will be socially just.

"Taxing property is the easy solution for revenues," Yannis Revithis, head of the Athens real estate brokers' association, told Greek TV. "But the real estate market cannot bear any more taxes."

The inspectors, known as the troika, interrupted a visit on Sept. 2 after a row over the size of the budget shortfall and its cause. Athens blamed it on a bigger than expected recession and Venizelos said on Sunday the economy would shrink by about 5.3 percent this year.

But the troika said that was only a small part of the reason and asked for urgent steps on privatisations, shutting down state organisations and cutting the number of civil servants.

Clouds have also gathered over Greece's second, 109 billion euro bailout agreed in July, with Finland demanding collateral for cash and banks haggling over participating in the package.

"We will do whatever it takes to have the deal approved by euro zone parliaments and to secure the agreement by about 400 banks," Papandreou said.

In Greece's paymaster Germany, voices demanding more from Greece to continue rescuing it from collapse intensified over the weekend.

German Economy Minister Philipp Roesler, leader of Chancellor Angela Merkel's junior coalition partner, said an orderly bankruptcy of Greece should not be a taboo and that sanctions should be considered for repeat fiscal offenders.

"To stabilise the euro, there can no longer be any taboos. That includes, if necessary, an orderly bankruptcy of Greece if the necessary instruments are available," he wrote in an article for Die Welt daily.

Papandreou dismissed talk that Greece may leave the euro.

"These scenarios are not serious," he said. "This would create a domino effect which would lead to the break-up of the euro zone."

(Additional reporting by George Georgiopoulos; Writing by Dina Kyriakidou; Editing by Karolina Tagaris)

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