Greek slump threatens debt plan, EU aid elusive

  • World
  • Friday, 12 Feb 2010

ATHENS (Reuters) - Greece's economy shrank more than feared last quarter and the government on Friday sharply revised down its figures for the previous three quarters as well, increasing doubts about its ability to resolve its debt crisis.

A European Union government source said meetings of the region's finance ministers next week were unlikely to put together an aid package for Greece, suggesting governments were still unable to decide how to prevent the crisis from hurting financial markets' faith in the euro zone.

Greek Prime Minister George Papandreou, saying his country had become "a guinea pig in a battle between Europe and the international markets", blamed bickering among EU bodies for delaying support for his country.

"There was a lack of coordination among the various bodies of the EU. The Commission, the member states, the ECB (European Central Bank), and even differences of opinion within these bodies," he told a televised cabinet meeting.

Underlining political obstacles to a rescue for Greece, an Emnid poll published on Thursday indicated 71 percent of people in Germany, which as the euro zone's richest member is key to any bailout, rejected the idea of financial aid for Greece.

The euro sank to a fresh eight-month low of $1.3529 against the dollar on Friday, while spreads for the government bonds of Greece and other heavily indebted states in the south of the zone widened.

Greece's gross domestic product contracted 0.8 percent in the fourth quarter from the previous quarter, much deeper than the 0.5 percent forecast in a Reuters survey, the government announced.


Just as damaging to confidence was the statistics agency's big revisions to shrinkages in past quarters: the first-quarter 2009 fall was changed to 1.0 percent from 0.5 percent, the second quarter to 1.9 percent from 1.2 percent, and the third quarter to 2.5 percent from 1.7 percent on an annual basis.

It is common for governments to revise GDP figures but large inaccuracies in Greek economic data -- some of them apparently deliberate and politically motivated -- have fuelled its debt crisis by angering investors and Greece's EU partners.

Last October, the incoming socialist government revealed Greece's 2009 budget deficit would be twice as big as a previous estimates -- and four times the EU ceiling.

Economists said the latest data suggested Greece's economy shrank around 2 percent over last year; that implies lower-than-expected tax revenues, hurting the government's efforts to slash the deficit.

A deep recession could also make Greek public and private sector unions, which have embarked on a series of one-day strikes to protest against austerity measures, even less willing to accept wage and spending cuts mandated by the government.

"The Greek government's (growth) forecast is far too optimistic," said Ben May of Capital Economics. "This is going to be another factor making the fiscal adjustment Greece is trying to achieve very difficult."

In an effort to prevent speculation about an eventual debt default by Greece, EU leaders pledged at a summit on Thursday to take action "if needed" to protect financial stability in the euro zone -- an unprecedented undertaking to bail out a euro zone member if that proves necessary.

But markets were disappointed by the vagueness of the pledge, which contained no details of the form the aid might take or when it might be disbursed.

The premium investors demand to hold 10-year Greek government bonds rather than benchmark German Bunds rose sharply on Friday to 302 basis points, from 275 bps late on Thursday.


In addition to the lack of agreement among EU member states on how to handle Greece, one reason for the vagueness of the summit's declaration appeared to be disagreements between politicians and ruling parties within countries such as Germany.

Berlin worries that helping Greece financially would set a precedent, making it liable for future bailouts of weak states in the south of the euro zone.

The EU government source told Reuters that EU nations had agreed they would step in with loans only as a last resort.

"I wouldn't expect anything (concrete on financial aid) at the Ecofin next week," said the source, referring to regular meetings of finance ministers from the euro zone and the full EU on Monday and Tuesday.

The source added that an adverse reaction in the financial markets could trigger a decision on aid at any time, but EU states were reluctant to come up with an aid programme quickly because leaders felt they had been "fooled" by Greece for years with inaccurate statistics and broken promises.

"The Greeks have fooled around with us for 10 years. That's why nobody is going to rush in a big aid package quickly," the source said.

Another EU source said that even if ministers could agree on details of an aid package next week, they would not announce those details publicly, because the EU did not want to give the markets the impression that indebted countries such as Greece, Spain and Portugal could count on unlimited EU assistance.

"We must keep the market uncertain," he said.

(Writing by Andrew Torchia; Editing by Mike Peacock)

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights

Next In World

Greece opens new migrant holding camp on island amid tougher policy
Some Afghan girls return to school, others face anxious wait
Mexican president pitches regional block similar to European Union
Three killed in blasts in Afghan city of Jalalabad, sources say
France says to work with India to promote multilateral order
Guinea junta brushes off impact of ECOWAS sanctions
Canada election in dead heat; Liberals drop candidate
Philippines divers clear plastic waste from corals for World Cleanup Day
Mali says it can seek military help from anyone, despite French concern
Poland's Kaczynski says primacy of EU law undermines sovereignty

Stories You'll Enjoy