Greece’s admission that it will miss its deficit target this year despite harsh new austerity measures sent stock markets reeling yesterday and raised new doubts over a planned second international bailout.
The gloomy news from Athens brought the specter of a debt default closer and weighed on talks among eurozone finance ministers in Luxembourg late yesterday on the next step to try to resolve the currency area’s sovereign debt crisis.
European bank shares suffered the heaviest falls on fears that private sector bondholders might be forced to absorb bigger losses than agreed in a July rescue plan for Greece, which was based on more optimistic growth forecasts.
The draft budget sent to the Greek parliament yesterday showed this year’s deficit would be 8.5 percent of GDP, well off the 7.6 percent agreed in Greece’s EU-IMF bailout program.
Greek Finance Minister Evangelos Venizelos said in a statement that next year’s fiscal targets would be met in absolute terms and Greece would have a primary surplus before debt service for the first time in many years.
However, next year’s deficit is projected to be 6.8 percent of GDP, rather than the 6.5 percent EU-IMF goal, because the economy is set to shrink by a further 2.5 percent after a record 5.5 percent contraction this year.
Deeper-than-forecast recession means public debt will be equivalent to 161.8 percent of GDP this year, rising to 172.7 percent next year, by far the highest ratio in Europe.
Greek Deputy Finance Minister Pantelis Oikonomou said the EU and IMF inspectors had “essentially concluded” negotiations to give Greece a crucial 8 billion euro (US$10.68 billion) installment of aid this month to avert bankruptcy.
However, a source familiar with the review by the troika of international lenders said the talks were not over and the inspectors were still examining both the budget numbers and other reforms required for the loan disbursement.
The 17 eurozone ministers were not to take any decision yesterday on releasing the funds, needed to pay this month’s salaries and pensions, since the troika has yet to report back. They are set to decide at a special meeting on Oct. 13.
The debt and GDP projections illustrate how Greece has fallen into a vicious spiral of recession, falling revenues, soaring unemployment and declining consumer purchasing power.
Officials expect the next aid tranche will be paid, because the eurozone will not be ready to cope with the fallout of a Greek default until its bailout fund, the European Financial Stability Facility, gets its new powers of market intervention ratified in the next two weeks.
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