Greece needs more measures to meet bailout terms: EU

A man rides his bicycle in front of a wall painted with the image of the fisherman village of Moita, on the outskirts of Lisbon May 12, 2011.

ATHENS/BRUSSELS (Reuters) - Euro zone policymakers piled pressure on Greece on Friday to drive through more austerity after bleak economic forecasts showed the debt-choked country would miss fiscal targets without further reforms.

Athens would fall short of its 2011 deficit target by two percentage points if it left policies unchanged, the European Commission said ahead of a meeting of euro zone finance ministers on Monday and the conclusion next week of an EU/IMF inspection of Greece.

"Because of weaker than expected growth last year, plus some fiscal slippages, there is need to take additional measures in fiscal consolidation still this year," EU Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.

"How much will depend on the assessment of our mission currently in Athens.

European Central Bank Governing Council member Ewald Nowotny said Greece was not meeting the terms of the 110 billion euro bailout which saved it from bankruptcy last year, giving the first public confirmation that the ongoing EU/IMF inspection team has found shortcomings.

"Greece has apparently not fulfilled the conditions sufficiently of late. The issue of privatizations will be the most sensitive point here," Austria's Kronen Zeitung quoted Nowotny as saying.

Without a shift of course, Greek debt would rise to 157.7 percent of gross domestic product this year and to 166.1 percent in 2012, rather than be 145.2 and 148.8 percent envisaged by the EU/IMF plan, the EU executive said in its twice-yearly forecasts.

It would also have a budget deficit of 9.5 percent of GDP this year rather than the 7.6 percent it was targeting.

Greek government sources told Reuters the EU/IMF inspectors were pressing Athens to cut public spending further to make up for a likely shortfall in revenue. They will also conclude a much awaited analysis of Greece's debt sustainability.

"They are concerned there is a high risk revenue targets will not be met and are pressing for more spending cuts," said one senior Greek government official who requested anonymity.

At stake is a 12 billion euro tranche of aid due next month, key to paying 13.7 billion euros of immediate funding needs. Without it, Greece could effectively default.

PRIVATISATION DRIVE KEY

Funding beyond the existing bailout is likely to be needed with ministers acknowledging Athens will be unable to return to capital markets to raise 27 billion euros next year, as foreseen in its EU/IMF program, and a higher amount in 2013.

Athens is also seeking a further extension of maturities on its 110 billion euros in rescue loans and a further cut in the interest rate on euro zone lending, which was reduced by one percentage point in March.

Euro zone finance ministers meeting on Monday in Brussels will tell Athens it must deliver on the fiscal and privatization targets if it wants new financing next year.

A senior EU source involved in managing the euro zone debt crisis told Reuters that Athens' European partners needed to see a breakthrough in Greece's stalled privatization program so the country can raise more funds by offering those assets, or securitized future revenues, as collateral for future loans.

Euro zone finance ministers would receive the inspectors' report at the end of May and were likely to take decisions on the next steps in June or more probably July, he said.

The head of Europe's EFSF bailout fund, Klaus Regling, also said privatization was the best way out of the crisis for Greece.

FLEETING GOOD NEWS

Greece received a rare piece of good news on Friday with its first positive quarterly GDP reading since the end of 2009, though that followed a vicious 2.8 percent contraction in the last quarter of 2010.

Analysts said it did not show a change in trend and the Commission forecast a deeper full year economic shrinkage for 2011, of 3.5 percent from a previous 3 percent projection.

"The fourth quarter was revised downward massively so that a rebound occurred in the first quarter of 2011. GDP will definitely fall again quarter-on-quarter in Q2," said Christoph Weil at Commerzbank.

A Greek government spokesman denied local media reports that the EU/IMF inspectors were asking Greece for 6 billion euros of extra austerity measures this year, double the effort planned by Greece in a fiscal plan outlined mid-April.

The government will present its final mid-term fiscal and privatization plan, at the center of the EU/IMF inspection visit, on May 18 or 19 and submit it immediately to parliament, spokesman George Petalotis said.

Greek Prime Minister George Papandreou said finger pointing in the euro zone was creating an atmosphere of gloom which would force Greece to pay ever higher borrowing rates.

"Even the IMF today is saying that our debt is sustainable, we can manage our debt without restructuring. However, the markets are pounding us incessantly, the media are predicting a doomsday, and this is promoting a culture of fear," he told a meeting of center-left politicians in Oslo.

The yield on the 5-year Greek bonds dropped on Friday but was still around 21 percent, a level which makes borrowing from the markets completely prohibitive.

(Additional reporting by Wojciech Moskwa in Oslo, Dina Kyriakidou and Harry Papachristou in Athens and Paul Taylor in Paris; writing by Paul Taylor and Ingrid Melander; Editing by Mike Peacock)