BUSINESS
05/03/2010 05:12 am ET | Updated May 25, 2011

Greece Announces Huge Budget Cuts As It Awaits EU 'Solidarity' On Debt Crisis

ATHENS, Greece - (By NICHOLAS PAPHITIS, AP) Greece has announced a new austerity plan worth euro4.8 billion ($6.5 billion) in savings to deal with the country's unprecedented financial crisis.

Government spokesman Giorgos Petalotis says the measures are split with euro2.4 billion ($3.3 billion) in new revenues like taxes and another euro2.4 billion in spending cuts.

He said Wednesday the measures include trimming civil servants' annual salaries with a 30 percent cut in their holiday bonuses, freezing pensions and imposing further cuts on stipends and bonuses.

Greece also increased the sales tax from 19 percent to 21 percent and hiked taxes on alcohol, cigarettes, luxury cars, yachts, precious stones and leather goods.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

ATHENS, Greece (AP) – Prime Minister George Papandreou said Wednesday that Greece was now awaiting strong support from the European Union after ordering even more painful budget measures officials say will save the country an euro4.8 billion ($6.5 billion).

Papandreou said he was "awaiting European solidarity" as he briefed Greece's president ahead of the formal announcement of renewed measures to defuse a government debt crisis that has shaken the entire EU and undermined the euro currency.

Speaking to reporters after the meeting, Papandreou said the measures were "necessary for the survival of our country and our economy."

Papandreou will meet German Chancellor Angela Merkel in Berlin Friday and French President Nicolas Sarkozy in Paris Sunday, as the European Union remains tightlipped over a possible bailout plan to be made conditional on the cuts.

Government officials said the measures would include cuts in civil servant's annual pay through reducing their Easter, Christmas and vacation bonuses by 30 percent each, and a 2 percentage point increase in sales tax to bring it to 21 percent from the current 19 percent.

In a dramatic speech to his Socialist party deputies in Parliament Tuesday night, Papandreou said his country was in a "state of war" and was fighting for its national survival.

The new austerity package comes after European Union officials bluntly 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.

One government official, speaking on condition of anonymity ahead of the official announcement, said the measures would send a "clear message to the European Union and international markets" and that "we have exhausted our limits."

Initial market reaction was positive. Analysts estimate that the package – set to be backed by the European Commission later – will give Greece enough breathing space to launch an expected euro5 billion bond issue over the next few days as the yield on Greek bonds has fallen to below the level they were at the time of the last auction.

Greece has around euro20 billion worth of debt maturing 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 euro-zone countries are still likely to be required, said Ben May, European economist at Capital Economics.

"The Greek PM's meeting with Angela Merkel on Friday could be crucial," he added.

In his Tuesday speech, 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 installments, with the last two considered holiday bonuses. Unions have said abolishing the 14th salary would be tantamount to a "declaration of war."

"It is a very difficult day for us ... These cuts will take us to the brink," said Panayiotis Vavouyios, the head of the retired civil servants' association. "Brussels is demanding cuts and the government is doing nothing to stop them. To make poor pensioners pay for this crisis is a disgrace."