Europe Economy

Greek Deficit Balloons Amid Battle Over 'Credibility' 

Greece’s 2011 budget deficit will be higher than originally thought. Just how high remains a point of disagreement between the Greek government and officials from the IMF and EU, as talks over handing over the next tranche of aid to the ailing euro zone member continue in Athens.

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Reuters reports that sources close to the IMF and EU now see the deficit hitting 8.6 percent of gross domestic product while the Greek government put the number closer to 8 percent, blaming a deeper than expected recession.

The IMF and EU, while aware of the recessionary impact, are reported to believe failure to implement medium-term fiscal plans are behind the higher than expected shortfall.

On Thursday, an economist in charge of Greece’s independent parliamentary budget committee, Stella-Savva Balfousia, resigned after saying Greece’s public debt dynamics where out of control and criticizing the government, which yesterday claimed the committee she led “lacks credibility.”

The news saw heavy losses on the Greek market at the open while bond spreads versus the German bund also widened.

This is worrying analysts at Credit Suisse, who believe Greece’s fiscal position is "disturbing."

“Further economic weakness expected this year, partly driven by the global slowdown, can only make things worse also on the fiscal front,” said Christel Aranda-Hassel from the economics team at Credit Suisse in London in a research note.

There are also fears over the viability of the Greek government’s privatization program, according to Aranda-Hassel.

“The severe decline in the Greek stock market in the past few months is complicating further the already challenging task of quickly selling significant Greek government assets,” Aranda-Hassel added.

Finland’s demands for collateral against any money it lends to Greece are also a worry but could be about to be resolved, with the Finish finance minister expected in Berlin for talks on Tuesday the 6th of September.

The problem of Finland being allowed a "free lunch" is that others could demand the same treatment but will be addressed, in Aranda-Hassel’s view, at the next meeting of euro zone finance ministers on September 16/17.

If the Finish problem can be overcome there remain major doubts about the level of private sector participation in a Greek debt swap at the heart of the second rescue package for Athens.

The Greek government has said that without 90 percent participation the deal could die and reports indicate only 60-70 percent of private bond holders have yet to sign up to the deal.

“There is a clear risk that participation ends up lower than targeted,” said Aranda-Hassel, who thinks any shortfall can be overcome. “We think that the exchange will go ahead also with a somewhat lower participation rate.”

The initial proposal assumes that 135 billion euros ($191.7 billion) will be rolled over given that 150 billion of bonds in the hand of the private sector mature between now and 2020, according to the Credit Suisse analyst.

"Assuming illustratively that a 75 percent participation rate is reached, then the 'funding gap' amounts to €22.5 billion over the next 10 years – or around 1 percent of GDP worth of additional funding per year: an amount that should be manageable," Aranda-Hassel wrote.