By COSTAS PARIS
Greece delayed plans to issue a 10-year bond until next week, after the government announces a new austerity package that will reduce spending between €2 billion and €2.5 billion ($2.7 billion to $3.4 billion), people familiar with the situation said. The government hopes to raise €3 billion to €5 billion from the bond offering.
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European Pressphoto Agency Protesters shouted during a demonstration in central Athens on Wednesday.
The government initially planned to issue the bond this week, according to a person familiar with the matter, but delayed the offering because of a 24-hour general strike on Wednesday and a warning by ratings agency Standard & Poor's the same day that it could downgrade Greece's sovereign debt within a month.
The delayed offering, along with the S&P warning and widening bond spreads, rattled investors across Europe Thursday and reignited expectations that Athens will require more than rhetorical support from European Union leaders to solve its fiscal crisis.
The new bond deal is widely seen as a test of the Greek government's ability to raise money in the capital markets to finance its operations and retire old debt. A successful bond sale will demonstrate that the market believes either that Greece can fix its fiscal problems or that Europe will come up with an effective bailout to solve short-term worries. An unsuccessful auction would exacerbate the sovereign-debt fears gripping financial markets and could force other European nations to move more quickly to support Greece.
The Greek stock market slid nearly 3% Thursday, and the euro slipped 0.5% against the dollar. This year, the Athens market is down almost 15% and the euro is off 5.5%.More broadly, the Pan-European DJ Stoxx 600 dropped 1.6% to 243.23, and the Dow Jones Industrial Average, having pared earlier losses, ended 0.5% lower Thursday.
The European Commission on Thursday said the EU's economic recovery remains fragile, noting that "mounting concerns about the sustainability of public finances in some [EU] states could have a stronger adverse impact" than expected. It didn't mention Greece specifically.
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Meanwhile, Germany reported that unemployment in Europe's biggest economy edged up only slightly to 8.7% in February despite a hard winter. Government-backed jobs programs likely played a part.
S&P said Greece faces a potential ratings cut of one or two notches, which would place the euro-zone nation on the brink of "junk" territory and would almost certainly make it more expensive for Greece to sell debt. S&P said it didn't expect a euro-zone nation to default, nor did it expect any country to withdraw from the euro in the midterm.
Greece needs to borrow around €54 billion this year. It has so far raised €13 billion. Since about €22 billion of bonds mature in March and April, that amount must be raised from the market before then.
Credit markets also signaled increased nervousness about Greece's debt. Yields on 10-year Greek bonds rose to 3.64 percentage points above safer German bonds but remain shy of the peak 4.05-percentage-point spread reached in late January. The cost to insure against a possible Greek default also rose, but those figures remain below January highs.
Greece is under intense pressure to lower its budget gap, which hit an estimated 12.7% of gross domestic product last year, compared with the EU's 3% limit. The Socialist government has pledged to cut that deficit to 8.7% of GDP this year, and below 3% by 2012.
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The new austerity steps, expected by midweek, would come in addition to previously disclosed plans for spending cuts and tax increases aimed at producing €8 billion to €10 billion in savings and additional revenue.
So far, those measures include a freeze on civil-service wages; cutting public-sector entitlements by 10% on average; a fuel-tax increase; and closing dozens of tax loopholes for certain professions, including some civil servants.
Since the EU expressed its rhetorical support for Greece on Feb. 12, member states including Germany and France have demanded that Greece take further steps to close its budget gap before they commit to giving it any specific financial support.Greece is weighing a further increase in fuel taxes, said a person familiar with the government's thinking, while the EU has also asked Athens to cut one of two extra months of pay that public-sector workers now receive over and above their normal 12-month salary—a move the government is resisting.
—Mark Gongloff, Emese Bartha and Clare Connaghan contributed to this article.
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