Fwd: (BN) Greek Deficit-Cutting Goal May Put Terms of Bailout at Risk: Euro Credit
Eric Tang
From: Eric <ecm...@gmail.com>Date: 18 November 2010 11:52:09 PM GMT+08:00To: "ecm...@gmail.com" <ecm...@gmail.com>Subject: (BN) Greek Deficit-Cutting Goal May Put Terms of Bailout at Risk: Euro CreditBloomberg News, sent from my iPad.Greek Deficit Target May Put Bailout Terms at Risk: Euro Credit
Nov. 18 (Bloomberg) -- Greece raised its current forecast for its budget deficit and depth of the economic contraction today amid doubts the nation will meet the terms of the 110 billion-euro ($149 billion) bailout that saved it from default.
Greek bonds slid after Austrian Finance Minister Josef Proell threatened on Nov. 16 to withhold his country’s share of the European Union loans because Greece wasn’t achieving its fiscal goals. The yield on the two-year bond jumped 70 basis points to 11.96 percent on the remarks to yield more than the country’s 10-year bond.
Prime Minister George Papandreou’s efforts to reduce the shortfall were hampered as revenue growth slowed and the EU revised down prospects for the economy and increased its estimate for the country’s debt. As a result, Greece won’t meet the government’s month-old forecast of reducing the 2011 budget gap to 7 percent of gross domestic product from 9.4 percent this year.
“The main worry in the market is, if you look at what’s going on, they told us they fixed things back in May,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said yesterday. “Now it’s November and the Greeks are 13 days away from a scheduled payment and they’re not qualifying for the money and suddenly it’s not fixed anymore.”
Recession Deepens
Greece now sees the deficit at 7.4 percent of GDP next year, according to the final draft of the 2011 budget released today in Athens. The economy will contract 4.2 percent in 2010 and 3 percent next year, more than the 4 percent and 2.6 percent respectively contained in the draft spending plan in October. The final budget includes 14 billion euros of revenue measures and spending cuts that aim to trim the shortfall by 5 billion euros.
The deficit tops the 7 percent target in the October draft, though is less than 7.6 percent of GDP contained in the May bailout plan. Next year’s deficit will be less than half the 15.4 percent in 2009. The EU revision left Greece surpassing Ireland for the region’s largest deficit last year.
“To the extent that many market participants and commentators have already concluded that Greece will not be able to achieve debt sustainability without a debt restructuring, today’s data will reinforce those perceptions,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, wrote in a note to investors on Nov. 15, after the revisions were released.
‘Major Credibility’
Papandreou yesterday defended the government, saying in an interview on BBC World television that Greece had gained “major credibility” in its effort to tackle the deficit he inherited when he was elected last year. The government had pledged to trim the shortfall by 5.5 percentage points of GDP this year and will achieve a 6 percentage-point reduction, he said.
The release of the final budget coincides with the spread of the European debt crisis to Ireland and Portugal. European finance ministers have tried to persuade the Irish government to accept an aid package to prop up its banks and calm financial markets. The yield premium investors demand to hold Irish 10- year debt over German bunds rose to 652 basis points on Nov. 11, the highest since the euro was introduced in 1999. The gap narrowed 20 basis points today to 530.9 basis points.
The Greek spread with Germany fell 13 basis points to 887 today, still the highest of any euro-region country. The gap has widened more than 450 basis points since the bailout was announced in May as investors bet austerity measures won’t be enough to fix Greece’s fiscal woes.
Default Risk
The cost of insuring Greek government debt against default jumped 22 basis points yesterday to 953 basis points, the highest since June 29.
The revisions of Greece’s data prompted senior European officials to call on the country to make more sacrifices.
Meeting the target for 2011 “may involve certainly new policies which were not asked for or contemplated before,” European Central Bank Vice President Vitor Constancio said in Vienna on Nov. 15. The goal “should be kept” and policies “should be adjusted to maintain that target,” he said.
Papandreou’s government pledged budget cuts and revenue measures amounting to 14 percent of GDP to secure the rescue funds. The effort included higher taxes and cuts to civil servants’ wages and benefits that led to months of strikes and protests.
Tax Increase
The new budget plan may further test the public’s patience as it adds new austerity measures and extends others already in place. The budget includes an increase in the country’s lowest value-added tax rate to 13 percent from 11 percent, the continuation of a special levy on corporate profits and a freeze on the nominal value of pensions.
More measures are also necessary because revenue growth has fallen short of government forecasts. Greece initially said higher sales, cigarette and alcohol taxes would help boost revenue by 13.7 percent this year. In October, that goal was trimmed to 8.7 percent and income grew just 3.7 percent in the first 10 months of the year.
Proell cited the revenue shortfall in his threat to withhold future Austrian aid contributions. The EU also pushed back until January payment of the third part of the bailout loans -- 9 billion euros -- that had been scheduled for December.
The Finance Ministry said yesterday in a statement that the government was fully funded through the end of January and the delay would not have an impact.
Proell softened his stance yesterday when he said Austria wouldn’t block the aid and Greece was “on a good path.”
To contact the reporter on this story: Natalie Weeks in Athens at nwe...@bloomberg.net .
To contact the editor responsible for this story: Angela Cullen at acul...@bloomberg.net
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