FEBRUARY 23, 2010, 2:04 P.M. ET

Greece Weighs New Austerity Cuts

By COSTAS PARIS And ALKMAN GRANITSAS

ATHENS—The Greek government is moving closer to choosing new austerity measures in discussions with a visiting delegation of European Union and International Monetary Fund officials over how to tame its deficit, according to people familiar with the government's thinking.
According to these people, the new package is likely to include an increase in the current value-added tax rate of 19%, more cuts in civil-service entitlements and higher duties on luxury items such as boats and expensive cars. Greece is also mulling a further increase in fuel taxes. The EU in these talks has also asked Athens to cut one of two extra months of pay that public-sector workers now get over and above their normal 12-month salary—a move the government is resisting, according to the people.
Greece has already said it plans a freeze on civil-service wages, cuts in public-sector entitlements by 10% on average, a fuel-tax increase and the closure of dozens of tax loopholes for certain professions—including some civil servants—who now pay less than their fair share in taxes. It says the spending cuts and tax hikes will produce some €8 billion to €10 billion ($10.88 billion to $13.6 billion) in savings and additional revenues.
The talks with the EU, which formally began Tuesday, are likely to wrap up Wednesday night. "The delegation will strongly urge the government to adopt additional measures worth €2 billion to €2.5 billion," the person said, adding that if those extra cuts were agreed upon the official announcement could follow early next week.
Italy's finance minister stressed the need for a coordinated response to Greece's financial woes, saying his country's doesn't have an individual position on the matter. "There is only a European position, and that should be as coordinated as possible," Giulio Tremonti told reporters Tuesday. "Talks are continuing." Mr. Tremonti declined to say whether EU finance ministers are pressing Germany, whose domestic wage deflation and huge trade surplus make it harder for Greece to export its way out of its woes, to boost consumption.
Since the EU issued its rhetorical support for Greece on Feb. 12, EU members such as Germany and France, among others, have demanded that Greece take further steps to close its budget gap before they would commit to any specific financial support for the country.
"The EU is suggesting an average cut of 7% in gross salaries through cuts in the entitlements of civil servants, while the government is proposing a maximum 5.5% cut," the person said. "If the EU gets its way the 14th-month salary will basically disappear." He said the visiting delegation will also be briefed on Greece's borrowing plans. Greece needs to raise about €54 billion this year and has so far borrowed €13 billion.
Greece is expected to come to market with a 10-year bond offering "quite soon," and possibly within the next few days, according to a person familiar with the matter. The issue, which is expected to raise between €3 billion and €5 billion, will be the second for Greece this year and the first since EU leaders declared their political support for Greece's borrowing program.
While Greece hasn't asked for financial aid from its EU partners, is instead pushing for a long-term loan of up to €25 billion, rather than bond guarantees, if the need arises.
Fitch Ratings downgraded four of the country's biggest banks, saying their already-weakening asset quality and profitability are likely to come under further pressure. The agency cut the long-term IDRs on National Bank of Greece SA, Alpha Bank AE, EFG Eurobank Ergasias SA and Piraeus bank to BBB—just two steps above junk.
Fitch said the Greek banks' already-weakening asset quality and profitability "will come under further pressure" because of fiscal adjustments that "need to be made" by the Greek government. Those adjustments will affect loan demand and put additional pressure on asset quality, which could result in higher credit costs and ultimately weaker underlying probability, Fitch said. Fitch said the banks' profits also are likely to be affected by increased funding costs because uncertainties surrounding Greek public finances "have, to a large extent, constrained" their access to wholesale and interbank markets at reasonable prices.
The outlook on the banks' ratings is negative but could be revised to stable if the quartet can successfully reduce European Central Bank funding and "rebalance their funding and liquidity position without impairing their profitability," Fitch said.
Greece's newest austerity measures are also sure to stoke further resistance from Greece's unions. Already, public-sector umbrella union ADEDY and its private-sector counterpart, GSEE, have announced plans for a 24-hour general strike Wednesday.
The strike is seen as the first major test of the government's commitment to push through its harsh austerity program. So far, the government has resisted demands by farm groups seeking further handouts, while separate strikes by tax collectors and customs officials have been called off or else ruled illegal.
Nevertheless, in the latest sign of labor unrest, a small group of about 200 left-wing protesters blocked the entrance to the Athens Stock Exchange earlier Tuesday and prevented staff from entering the building.
Trading operations were unaffected by the protesters, who gathered outside the building with banners that read: "The crisis should be paid for by the plutocracy" and, in a reference to the many offshore companies controlled by wealthy Greeks: "100,000 offshore companies have pillaged €500 billion."

—Nathan Becker contributed to this article.

Write to Costas Paris at costas.paris@dowjones.com and Alkman Granitsas at alkman.granitsas@dowjones.com

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