Greek 2013 budget sees sixth year of recession

ATHENS (Reuters) - Greece will bring forward painful budget cuts to end a decade of primary deficits while grappling with a sixth year of recession, according to a 2013 budget draft aimed at satisfying international lenders.

The government unveiled a tough austerity budget after Finance Minister Yannis Stournaras met the so-called "troika" of International Monetary Fund, European Commission and European Central Bank inspectors, whose approval is vital to unlock the next installment of aid, urgently needed to avoid bankruptcy.

Greece will aim for a primary surplus before debt servicing of 1.1 percent of GDP next year, the first positive balance since 2002, after a 1.5 percent deficit in 2012. But the economy will shrink for a sixth year, by 3.8 percent.

There was no immediate comment from either EU authorities or the IMF on the budget, but Greek Finance Ministry officials said the troika still objected to some of the measures.

Economic output will have declined by a quarter since 2008 in a vicious spiral of austerity and recession, with the most heavily indebted euro zone nation repeatedly missing targets set under its EU/IMF bailouts and at risk of being forced out of the single currency bloc.

Analysts said even the recession scenario set out in the budget appeared optimistic, given Greece's slow reform efforts and a weakening euro zone economy.

"Chances are the budget targets will be missed because of the deeper recession which the cuts will bring and the inability to meet privatization targets," said Xenofon Damalas, head of investment services at Marfin Egnatia Bank.

The general government deficit, including debt servicing costs, will come to 4.2 percent of GDP next year from 6.6 percent in 2012, while unemployment will rise to 24.7 pct.

The draft gave no target for privatization revenues. In a sign of the daunting scale of Greece's problems, public debt is projected to reach 179.3 percent of GDP next year despite a major writedown of debt owed to private investors this year.

PAINFUL CUTS

The budget will make more cuts to public sector pay, pensions and welfare benefits as part of an 11.5 billion euro ($14.8 billion) austerity package of savings spread out over the next two years.

"We must hold on tight to the helm to make the difficult turn," Stournaras said. "It's the only way for the Greek economy to return to the righteous cycle of fiscal stability and growth."

Labor unions were quick to respond, vowing new strikes this month after a crippling walkout marked by clashes last week.

"We don't have any other option. We can't just sit around doing nothing," said Nikos Kioutsoukis, general secretary of the largest private sector union GSEE.

Austerity-weary Greeks have taken to the streets in often violent protests against waves of salary and pension cuts that have driven many to the edge.

Prime Minister Antonis Samaras, who has vowed this is the last round of cuts, also met the troika chiefs later on Monday to convince them to lift their last objections, but there appeared to be little progress.

"There are discussions on the measures. The troika wants clarifications," Stournaras told reporters after the meeting. Officials said inspectors doubt about 2 billion worth of measures would actually be delivered.

Dozens of protesters waving Greek flags and shouting "out with the troika" jeered the international creditors' envoys as they entered the finance ministry on Monday.

At stake is a 31.5 billion euro installment from a 130 billion euro second bailout keeping Greece afloat. Lenders have made clear no money will be disbursed without credible measures.

However, two German magazines reported on Saturday that Athens would receive its next aid tranche despite budget shortfalls and slow progress on reforms because the euro zone does not want any country to leave the common currency.

Lenders are coming to terms with the fact Greece will need more time, more funding or a restructuring of official debt - that owed to European governments - to survive. Sources have told Reuters the IMF would prefer bondholders to take another haircut, but EU governments, which would incur most of the losses, would rather give Athens more time.

"Those who accept Greece's optimistic predictions want to gain time to resolve the debt crisis overall," Damalas said. "But talk has already begun that the austerity measures are not enough and a new, official haircut will be needed, which explains the tension between the IMF and the EU."

In Germany, the biggest contributor to euro zone rescue funds, the prospective opposition candidate for chancellor, Peer Steinbrueck, said on Sunday the Greeks should be given more time and help to meet their reform targets.

However, Slovak Prime Minister Robert Fico predicted in a television interview that the euro zone would not survive in its current form and said Greece and possibly another country would be forced to leave once it became clear they were unable to meet their commitments.

TENSIONS RISE

Two junior leftist parties in Samaras's coalition government have resisted the cuts and a handful of deputies have warned they will vote against the bill in parliament, which will debate the draft and vote on the final version in mid-December.

"We are trying to rescue whatever we can, even at the eleventh hour," Andreas Papadopoulos, spokesman for the small, co-ruling Democratic Left party, told Reuters, signaling the battle in parliament will be intense.

Analysts expect the coalition, which holds 178 out of 300 parliament seats, to pass the bill despite any defections. The final budget is expected to differ from the draft.

Government officials said Athens will frontload a big chunk of the new spending cuts under negotiation with the troika, which has yet to approve the 7.8 billion euros worth of measures, which include 3.8 billion in pension cuts and 1.1 billion in state salary savings.

Belt-tightening has taken a toll on economic activity, suppressing domestic demand and putting one out of five Greeks out of work. Returning to a primary surplus will hinge on how faithfully the government sticks to the unpopular measures after years of missed targets that have angered its partners.

"In terms of the government meeting the targets, it will be very difficult," said Ben May, European economist at London-based Capital Economics, adding that tensions within the coalition could derail efforts, especially if the troika asks for additional measures later.

"We are at the stage where all the easy options have disappeared," he said.

($1 = 0.7773 euros)

(Additional reporting by Karolina Tagaris and Renee Maltezou; Writing by Dina Kyriakidou; Editing by Paul Taylor and Will Waterman)