Greece’s new Prime Minister George Papandreou has promised to reduce his government’s budget deficits to below three percent by 2013 in a speech to labour and business leaders. The government deficit has grown to an estimated 12.7 percent this year, and public debt stands at €300 billion, almost 120 percent of GDP. Papandreou announced cuts to the defense budget and to bonuses in the public sector, as well as reductions to social security and general government expenditure.

Market reactions to the speech were muted, with the spread on Greek 10-year government bonds over German bunds rising to 222 basis points, compared to 207 before the speech. Commentators said there was nothing new in the speech. Last week Fitch’s, a credit rating agency, downgraded Greek sovereeign debt to BBB+.

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