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EU backs Greece's fiscal cuts

Greece's deficit-cutting plan is ambitious but achievable, the EU economic and monetary affairs commissioner said, warning however that Athens may have to take extra measures to shore up its finances.

The remarks by Joaquin Almunia came as a key economic indicator showed Greece's factory sector shrinking faster in January while major euro zone partners thrived -- a grim backdrop for a country desperate to mend its broken finances.

The European Commission is due to publish recommendations on Wednesday on Greece's austerity plan to slash a double-digit budget deficit, which is a main reason Greece has taken a pounding in the markets for weeks.

Greece's financial problems have also sparked talk about a possible bailout by the EU and fears of a spill-over effect on other weak, heavily-indebted countries in the euro zone.

“What we are saying to the Greek authorities is: your stability program has established ambitious targets and objectives and we fully endorse these ambitious objectives,” Almunia said in comments exclusive to Reuters.

“We consider that the achievement of these objectives in the coming three years, before the end of 2012, is absolutely necessary. These objectives are achievable but they are surrounded by risks.”

Greece, faced with its biggest fiscal crisis in decades, pledged last month to reduce its budget shortfall to below 3% of gross domestic product (GDP) in 2012 from 12.7% in 2009.

The gap in its public finances has prompted a series of downgrades by rating agencies and unnerved financial markets worried that Athens may not be able to service its debt -- which is expected to hit 120% of GDP this year.

Adding to Greece's woes on Monday, a purchasing managers' index survey on the manufacturing sector hit an eight-month low in January, in contrast to growth in major euro zone economies and signaling no quick end to Greece's first recession in 16 years.

Greek GDP is seen shrinking 0.3% this year after a 1.2% contraction, according to government forecasts.

“The economic cycle in Greece lags that of the euro zone by at least 6 months,” said Nikos Magginas, an economist at the National Bank of Greece. “At the same time the poor fiscal situation and the general sense of uncertainty created by market pressures on the servicing of Greece's debt are weighing on business confidence and delaying investment decisions.”

The ruling socialists, who came to power in October pledging to tax the rich and help the poor, have presented measures including tax hikes, a freeze on public sector wages of over €2,000 a month and a hiring slowdown.

The EU has urged Greece to take tough, Ireland-style measures but the government is wary of public reaction to tougher measures, fearing social unrest, with strikes planned for this month.

A report in Greek newspaper Ta Nea on Saturday said Brussels would tell Greece to take extra measures to put its house in order, including cutting nominal wages in the public sector and imposing a ceiling on high pensions, and set a May deadline.

Almunia said the EU Commission “fully endorsed” Greece's objectives. Greece's plan envisages welfare spending cuts, improved tax collection and a reduction in special allowances that make up a large chunk of Greek civil servants' overall income. This would translate roughly into a 3% cut in the public wage bill.

But he warned the EU would thoroughly monitor Greece's progress, and would demand additional measures if needed.

“We will not accept slippages on the path to the targets,” he said. “Every time we see slippages, because some risks materialize, we will ask for additional measures to correct these slippages.”

The Commission recommendations will be adopted by EU finance ministers at their next meeting on February 15-16. Greece will have to submit its first report on the implementation of the steps by March 16, then by May 15 and after that every three months.

After seeing bond yields soar last week as investors demanded a higher premium to hold Greek debt, Athens won some respite on Monday with the spread between Greek and German 10-year bonds tightening to 336 basis points. The spread hit a euro lifetime high of around 405 basis points on Thursday.

The cost of insuring Greek government debt against default also fell on Monday.

Greece, which needs to raise €53 billion this year, succeeded in selling €8 billion of 5-year bonds last Monday -- but only at a high price. It plans to sell more this month, but Finance Minister George Papaconstantinou said the next bond would have to be carefully timed to avoid having to pay unaffordable yields.

Investment bank Citi reported on Monday that Greek government bonds lost investors 5.07% on the month in January as fears swirled about the country's finances. (Reuters)