Greece unveils drastic austerity package

Under pressure from investors and neighbors alike, Greece unveiled a drastic new austerity package Wednesday aimed at slashing $6.5 billion from a towering government deficit that has roiled international markets and endangered the stability of the euro.

Calling it a “matter of survival,” Prime Minister George Papandreou said the plan to raise taxes and cut public spending would free his country from the iron grip of speculators who have bet in recent weeks that debt-ridden Athens would default on its bills.

“This was a necessary decision,” a grim-faced Papandreou said after talks with Greece’s president on the matter. “It was not a matter of choice.”

The unprecedented austerity program was immediately denounced by trade unions, civil servants and other activists who complain that they are being forced to bear the brunt of the government’s wrenching retrenchment efforts.

The new package includes a hike in sales tax from 19% to 21% and increased levies on alcohol, cigarettes, luxury yachts, cars and precious stones. It also orders cuts in benefits and salaries for Greece’s massive public sector, a 5% reduction in education spending and a freeze on state pensions.

Before Wednesday’s announcement, Athens had been under mounting pressure from fellow European Union members to demonstrate its commitment to bringing down the massive budget shortfall equivalent to 12.7% of gross domestic product, more than four times the rate allowed for countries that use the euro.

Papandreou has been busy meeting leaders in the region to shore up support for his financially beleaguered country. On Friday, he is to meet with German Chancellor Angela Merkel, head of the EU’s biggest and richest country and one of the most adamant that Greece show itself willing to make painful decisions. Papandreou is also expected to meet French President Nicolas Sarkozy on Saturday and President Obama later.

Analysts say the austerity program should give Papandreou some breathing room in his meeting with Merkel as well as reassure jittery markets as Greece prepares to launch a bond issue worth up to $7 billion to service its debt.

Since Athens revealed the extent of its budget woes last October, international bond markets have driven up the cost of borrowing for Greece and sparked fears of cascading debt crises along Europe’s outer rim. Spain, Portugal and Ireland -- in addition to Greece -- are grappling with alarming deficit levels, sparking the biggest test for the euro since its introduction 11 years ago.

Greek officials hope a successful bond sale will help restore investor confidence in their ability to fix the nation’s accounts and also convince Europe to offer some sort of support package, perhaps in the form of loan guarantees. But with Greece’s history of labor and social unrest, Athens must also be mindful of pressures at home.

In the face of widespread public discontent and dissent from some of his own Socialist lawmakers, Papandreou dropped an initial proposal to scrap one of two months of extra pay that public-sector workers traditionally receive every year. Instead, the government opted for a 30% cut in holiday bonuses.

That still had activists fuming.

“The measures are lopsided,” labor leader Yannis Panagopoulos said after talks with Papandreou. “There is no sense of social justice.”

As word of the new austerity measures spread Wednesday, hundreds of senior citizens broke through a police cordon guarding the prime minister’s office to protest pension freezes.

In Athens, dockworkers protested layoffs, and the civil servants union called for a strike.

henry.chu@latimes.com

Carassava is a special correspondent.