Greek debt fears fuel new aid talks

2011-05-16 16:37

Brussels - The European Union warned on Friday that Greece's already massive debt is growing much faster than forecast, putting pressure on the region's finance chiefs to come up with new support for the country at their get-together next week.

Until a few days ago it looked as if the main objective of this month's meeting of EU finance ministers was to sign off on a €78bn aid package for Portugal. But admissions that Greece's €110bnn rescue plan agreed last year is failing to restore investor confidence have brought the focus back on Athens.

Several EU officials have hinted in recent days that Greece may need a second bailout to plug financial shortfalls in 2012 and 2013, but stressed that any new help would only come in return for further austerity measures and economic reforms.

At their meetings on Monday and Tuesday in Brussels, EU finance ministers had expected to be joined by Dominique Strauss Kahn, the head of the International Monetary Fund (IMF), which is responsible for one-third of Greece's existing loan package.

However, the IMF chief was detained on Sunday in New York on charges he sexually assaulted a maid in his hotel room. The IMF named an acting leader and said it remains "fully functioning and operational" despite the arrest.

Strauss-Kahn had been scheduled to travel to Berlin on Sunday to meet with German Chancellor Angela Merkel, whose stance on potential aid will be crucial.

Serious situation

The Greek situation comes just one week after the region's financial heavyweights discussed the country's problems in a secret meeting in Luxembourg.

The EU's Monetary Affairs Commissioner Olli Rehn on Friday called the situation in Greece "very serious" and said the country needed to cut spending even further than foreseen in its bailout programme.

Greece's debt will reach 157.7% of economic output this year and jump to 166.1% in 2012, the European Commission, the EU's executive, said in its biannual economic forecast. That's up from 150.2% and 156% respectively it predicted last fall.

The country's budget deficit doesn't look much better, reaching 9.5% of GDP this year, about 2 percentage points above previous predictions and the targets set out in its bailout programme. The shortfall is expected to remain high at 9.3% in 2012.

The pessimistic financial data are in part due to Greece's economic collapse over the past two years and mean the country will be effectively locked out of international debt markets for longer than expected.

In 2012, Greece is supposed to raise €27bn to help pay its bills, but with investors demanding a 15% interest rate to give it 10-year loans, that prospect looks increasingly unlikely.

Debt restructuring ruled out

The Commission's sharp debt revisions will likely spice up discussions among finance ministers on Monday and Tuesday. It will also fuel calls from many economists who say the country needs to restructure its debts -forcing private creditors like banks and investment funds to accept later or lower repayments on the bonds they hold.

European officials have so far ruled out a debt restructuring, arguing that it could trigger financial panic similar to the aftermath of the collapse of Lehman Brothers in 2008. However, pouring yet more money into the eurozone's weakest states is becoming more and more difficult, with opposition to bailouts growing in rich and poor countries.

Finland on Friday barely managed to get approval of the promised rescue loans for Portugal from its parliament and set tough preconditions for future bailouts.

Citizens of the weaker countries, meanwhile, feel like they are being ripped off by the rich states, who demand high interest rates for rescue loans, and the big banks that were central to the financial crisis but whose bondholders have largely been spared from losses.

Many economists - and a growing number of politicians - are arguing that the bailouts simply aren't working, forcing hardship on taxpayers while crimping economic growth.

The Commission's economic forecasts appeared to support that view. The national debt of Ireland - the second country to get bailed out last year - is expected to hit 112% of gross domestic product this year before rising to 117.9% in 2012. That's up from earlier forecasts of 107% and 114.3%.

Economy to contract

Its economy is predicted to grow a meagre 0.6% this year, while it will likely run a deficit of 10.5%, up from 10.3% forecast in the fall.

Even more severe revisions were made for Portugal, which at the time of the last forecast was still hoping to avoid a bailout.

Portugal's debt will likely stand at 101.7% of GDP in 2011 and increase to 107.4% next year, the Commission said. That's up from 88.8% and 92.4% previously. On top of that, the Portuguese economy is expected to contract 4% over the next two years.