Greece Readies Austerity Push

By ALKMAN GRANITSAS And COSTAS PARIS

ATHENS—Greek Prime Minister George Papandreou will seek cabinet approval Thursday for a new austerity crackdown, despite increasing popular resistance and signs of wavering support inside his own party.
The new spending cuts and a planned acceleration in the sale of state assets, which could cost thousands more jobs, were set by the European Union and International Monetary Fund as a condition for more aid.
The latest moves are turning up the heat on Greece's politics as Athens complies with conditions set for a second bailout, set to include banks voluntarily offering to extend the maturities on the Greek bonds they own.
The specter of political risk amplifies concerns voiced by the European Central Bank, which warned that rescheduling Greek debt is fraught with danger and could cause investor flight that would shake the European banking system.
Government officials say even members of the cabinet—unnerved by daily mass demonstrations outside the Parliament building and across Greece—oppose some of the new measures.
Meanwhile, Greece's official creditors acknowledged that the country will remain locked out of financial markets all through next year, according to a draft summary of a report by the so-called Troika.
The report by officials from the European Commission, the European Central Bank and the International Monetary Fund says that Greece's recession will be deeper and longer than projected, and consequently will take longer for the country to regain the markets' confidence.
The report highlights the degree to which Greece had fallen short of the targets set in last year's agreement with the official creditors, which was the basis for its €110 billion rescue package. Greece's failure to meet those targets is now forcing creditors to come up with a supplementary plan.
Meanwhile, fresh economic data showed that the country remains mired deep in recession.
Young people are still the hardest hit by Greece's deepening economic woes, with 42.5% of those between ages 15 and 24 without jobs in March—a sharp increase from 29.8% a year earlier.
The decline in industrial output accelerated in April, falling 11% from the year-earlier level after an 8% drop in March.
Greece has promised the EU and IMF that it will implement €28 billion in fresh spending cuts and new taxes to bring the country's budget deficit below 1% of gross domestic product by 2015, down from 10.5% last year.
Although the final details have yet to be announced, the government is considering several highly unpopular measures, such as new taxes on the poor, an extraordinary 3% levy on all Greek wage earners, new property taxes and cuts in retirement bonuses.
Spending cuts include deep cutbacks in welfare payments and possibly even layoffs in Greece's long-cosseted public sector.
The severity of the measures could test the government's hold on office.
With a six-seat majority in Parliament, the ruling Socialists are vulnerable to defections if public pressure intensifies, as many expect.
Some political analysts, including some senior Socialist party officials, expect that as many as three party members will vote against the new austerity crunch.
"Faced with the country's big financial difficulties and these protests on the streets, many Socialists may not follow the party line, and that risk grows with every day that goes by," said George Kyrtsos, political commentator and editor of the City Press newspaper. "At some point, the government is going to call early elections."
On Sunday, an estimated 100,000 Greeks demonstrated outside Parliament to protest the new austerity measures.
The demonstration was the largest organized by a grassroots movement of self-proclaimed "indignant" citizens who have been staging daily protests in the central square of Athens for the past two weeks.
The movement, organized over Facebook, is modeled on a similar grassroots protest in Spain known as Los Indignados, and brings together a wide segment of society—it includes youth, retirees, even priests.
At the same time, Greece's unions, a core constituency of the Socialists, are planning a nationwide general strike for June 15, and a smaller-scale walkout Thursday to oppose the government's privatization plans.
"The new package will need to be implemented," said one senior Socialist party official. "But you may get half a million people in the streets of Athens. How do you deal with something like this? In a democracy you go to elections."
Write to Alkman Granitsas at alkman.granitsas@dowjones.com