The European Union vowed on Wednesday to hold Greece strictly to an austerity plan to tackle the most severe debt crisis in the euro zone as market turmoil widened with Portugal giving investors a new fright.
The European Commission put Athens on an unprecedented short leash, demanding an interim report by mid-March on progress in reducing its huge deficit, and quarterly updates thereafter, partly due to accumulated mistrust of Greek statistics.
The EU executive conditionally approved Greece's three-year fiscal plan but said further cuts in public sector wages would be required if, as many economists believe, measures announced so far are insufficient to meet steep deficit-reduction targets.
Greek bonds and stocks rose briefly in response to Brussels' approval, but markets dipped again and ended in negative territory after fellow euro zone weakling Portugal cut a planned treasury bill issue due to high borrowing costs.
A looming vote in the Portuguese parliament on Thursday on a law on regional financial transfers which the government says could undermine efforts to cut the budget gap added to unease.
Spain also fueled jitters by disclosing that its budget deficits for the next three years will be higher than forecast.
The EU said the Greek plan to cut the budget gap from 12.7 percent of gross domestic product in 2009 to below 3 percent in 2012 would not be easy to implement and the Socialist government must be ready to make further deep fiscal adjustments.
"If the program is followed by decisions, by actions ... this will have a positive effect on the market," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
"If decisions are not there, the markets will be putting additional pressure."
The premium investors demand to hold Greek government bonds rather than benchmark German Bunds widened again after briefly falling on the EU endorsement.
The cost of insuring Greek debt against default also rose, signaling that Greece was not out of the woods and implementation was key.
"The market appears to be taking over from the European Commission the role of enforcer of fiscal discipline, and it could prove far more efficient and brutal than the Stability and Growth Pact," said Unicredit chief economist Marco Annunziata.
Greece's main private sector union GSEE called a one-day strike for Feb. 24, following public sector union ADEDY, which has set a walkout for Feb. 10, both in protest at EU-prescribed austerity measures.
In the streets of Athens, people said they would accept even tougher measures if they believed they would avert economic collapse but had little faith those taken so far would help.
"I don't believe the government can get us out of the crisis," said Nikos Haldoutas, 32, who works in the film industry. "I've thought of leaving this country, because I don't think anything will change in the next 50 years."
Almunia dismissed concerns that Greece's fiscal problems could put the single European currency at risk or require a bailout by European partners to avoid a possible default.
"I am fully convinced that the European Union and euro area have instruments enough to deal with this issue and solve this problem (Greece)," Almunia said.
Some economists have argued that Greece should seek an International Monetary Fund loan and supervision of its adjustment program.
But euro zone countries have been adamant that the EU can handle the matter without IMF intervention, which would be politically embarrassing and imply a failure of the EU's Stability and Growth Pact budget rules.
Spain said on Wednesday it now expects its budget deficit to total 9.8 percent of GDP in 2010, 7.5 percent in 2011 and 5.3 percent in 2012 — estimates that are 1.7 to 2.3 percentage points above previous forecasts.
Portugal's debt agency IGCP cut its planned T-bill placement to 300 million euros ($417.2 million) from 500 million on Wednesday as yields spiked by 49 percent over January's placement, traders said.
On the eve of the Brussels verdict, Prime Minister George Papandreou went on television to announce fresh savings measures including a fuel tax rise and a wider freeze on public pay, warning Greeks they face the most severe crisis in decades.
Deputy Finance Minister Philippos Sachinidis told Reuters the fuel surcharge should raise an extra 1 billion euros this year and the public wage freeze about 150 million euros to 200 million euros.
Markets are concerned that the government may find it difficult to sell harsher austerity measures at home and may face a violent backlash in a country with a history of political riots, even though public opinion is broadly supportive for now.
The main conservative opposition party, which lost October elections to the Socialists due to scandals and the economic slowdown, said they would support tough measures but leftist parties vowed to fight them.
Greece has to refinance 54 billion euros in debt this year, with a crunch in the second quarter as 20 billion euros becomes due. A 5-year bond issue last week was five times oversubscribed but the government had to pay a hefty premium.
Greece's public debt is expected to hit 120 percent of GDP this year. Fears of a possible default have reverberated across the euro zone, hitting the common currency and bond prices and prompting speculation of a bailout plan which EU officials deny.
The austerity program, presented last month, includes welfare spending cuts, tax hikes, non-replacement of departing civil servants and cuts in top-up wages for higher earners in the public sector.
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