The global unease sparked by Dubai’s debt woes has trained a spotlight on Greece, where the combination of a widening public deficit and a huge official debt has unsettled European market watchers.
The concerns, which could harm the country’s ability to borrow money on financial markets, reflect mounting anxiety about the health of the Greek economy after the new socialist government revised key data published by the previous conservative administration.
New calculations show Greece is facing a public deficit this year of 12.7 percent of GDP and debt of 113.4 percent, both figures far exceeding EU regulations of 3 percent and 60 percent respectively.
Fears for the fate of finances in both Dubai and Greece weighed on equity markets near the end of the week, reawakening “interest in risk aversion trade,” analysts at RBS bank said.
Investors on Thursday dumped stocks and sought out safe-haven assets such as bonds.
In a related development on Friday, Greek government bonds signaled a widening confidence gap with the eurozone benchmark German bond.
The difference between the interest demanded by investors from Greek and German bonds grew to 2 percentage points, the biggest spread since doubts about the standing of the Greek economy emerged early this year.
The gap means the price of Greek bonds, sold by the government to finance its yawning deficit, has fallen. That in turn pushes up the fixed income offered on the bonds in percentage terms, signaling that when the government issues new debt it will have to offer a higher rate of interest.
The fall in the bond price also focused attention on the credit rating of such bonds, especially as the Fitch agency a month ago lowered its rating on Greece, giving its economy a “negative” outlook.
Greek Finance Minister George Papaconstantinou on Friday said that the latest market pressures did not “affect the Greek state, which has no immediate borrowing needs.”
The country would borrow less next year than it did this year, Papaconstantinou said.
“The trouble on the markets arises from the country’s loss of credibility that we inherited from the previous government, and also from speculative activity,” he said.
The government’s budget projections for next year call for the deficit to be pared back to 9.1 percent of output, thanks to a planned 2.3 percent cut in public spending compared with this year.
Greece is expected to see a 1.2 percent contraction in its economy this year and 0.3 percent next year.
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