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Greek slump threatens debt plan, EU aid elusive
February 12, 2010 / 3:52 AM / in 8 years

Greek slump threatens debt plan, EU aid elusive

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.

<p>A woman counts euro banknotes in front of an advertisment poster inside a branch of the National bank of Greece in Athens February 10, 2010. REUTERS/John Kolesidis</p>

Euro zone sources preparing for meetings of the region’s finance ministers next Monday and Tuesday said ministers would not discuss specific ways of supporting Greece.

Ministers will focus instead on pressing Athens to implement steps it has promised to cut its budget deficit, the sources said. The lack of debate on a concrete aid plan suggested European governments remained unable to decide how to stop 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 European Union 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.

INACCURATE STATISTICS

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 fueled 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.

<p>(L-R) European Central Bank (ECB) President Jean-Claude Trichet , European Commission President Jose Manuel Barroso, Germany's Chancellor Angela Merkel, Greece's Prime Minister George Papandreou, France's President Nicolas Sarkozy and European Council President Herman Van Rompuy leave the EU Council building after a meeting before an informal summit of European Union heads of state and government in Brussels, February 11, 2010. REUTERS/Yves Herman</p>

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.

Slideshow (8 Images)

But markets were disappointed by the vagueness of the pledge, which contained no details of what 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.

POLITICS

In addition to the lack of agreement between 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 any future bailouts of weak states in the south of the euro zone. In addition to Greece, markets have been speculating about Portugal and Spain.

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

The source said 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 rapidly 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.

Editing by Andrew Torchia and Mike Peacock

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