Greece’s economy will contract by 2 percent this year — the same as last year and worse than the government predicts — owing to the painful impact of government spending cuts, the Bank of Greece forecast on Monday.
In an annual report, the central bank approved of the government’s austerity measures worth 4.8 billion euros (US$6.5 billion) aimed at controlling the high budget deficit, but said they would prolong an already deep recession.
Its forecast compares with the center-left government’s prediction for a contraction of 1.2 to 1.7 percent this year, while the EU Commission projects a 2.25 percent contraction.
Greece says it needs Europe’s “political support” to lower borrowing rates but insists it is not seeking a bailout to stave off the threat of default.
Monday’s report was released as EU countries wrestled over possible solutions to help Greece ease its months-long financial crisis.
The continued uncertainty hurt Greek stocks, with Athens Stock Market’s benchmark general index down 2.75 percent in mid-afternoon trading. The spread between Greek 10-year bonds and equivalent German issues grew to about 340 basis points.
While the markets reacted nervously on Monday, a senior banking official in the US warned that Greece’s debt crisis could hit the US economy.
Dennis Lockhart, the head of the Federal Reserve of Atlanta, warned the Greek crisis could have a knock-on effect on the US economy.
Adjustments across the EU to fiscal problems resulting from the crisis could dampen eurozone growth and limit US exports to that region, he said. The EU is the largest export market for the US.
The crisis could also lead to currency flows from the euro into “safe-haven” US dollar assets, pushing the dollar’s value up and thus hurting US export competitiveness, he added.
Greece’s plight could also send shockwaves through the financial markets, thus disrupting the banking system, Lockhart argued.
European finance ministers last week discussed plans to provide loans for Greece if necessary but did not announce any firm decisions. They said they would wait for political backing from the summit of EU leaders this week.
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