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10/03/2011 03:26 PM

Bad News from Athens

Greek Budget Figures Complicate Bailout Efforts

The Greek economy is still shrinking -- and will continue to do so through next year, thecountry's Finance Ministry announced on Monday. In addition to missing its deficit targets, the

continued contraction has multiplied doubts as to the wisdom of saving Greece at all.

Just last week, international markets were buoyed by hopes that Europe, finally, had decided to

throw the kitchen s ink at the euro crisis. On Thursday, Germany's parliament seemed to justify

those hopes by approving its share of the expanded European Financial Stability Facility(EFSF).

What a difference a weekend makes. On Sunday, Greece announced that its 2011 budget deficit

will be 8.5 percent of gross domestic product, well higher than the 7.6 percent it targeted last

year as part of its ambitious plan to return to fiscal health. And on Monday, new figures indicate

that the country's economy will contract by 2.5 percent in 2012 instead of the hoped for growth of

0.6 percent. Stock markets around the world plunged as a result.

The figures have been made public as officials in Athens struggle to put together a budget for

2012 amid growing doubts that the country will be able to avoid insolvency. The country is also

anxiously awa iting a report by officials from the European Union, the European Central Bank and

the International Monetary Fund -- a group known as the "troika" -- which will determine whether

Athens is eligible for the next, 8 billion payment from the ongoing 110 billion bailout passed in

2010.

In an effort to satisfy austerity demands made by the troika, Greek Finance Minister Evangelos

Venizelos announced this weekend that 30,000 public sector jobs were to be cut by Christmas.

The cuts, Venizelos hopes, will help lower the country's budget deficit to 6.8 percent of GDP in

2012, which is still higher than the 6.5 percent originally envisioned. He a lso says that the movewill return the budget to surplus status once debt-service payments are factored out.

"The 2012 budget completes an intense and difficult effort of fiscal adjustment, reaching a primary

surplus of 3.2 billion in 2012 from a primary deficit of 24 billion in 2009," he said in a statement.

Particularly Ominous

The new numbers are particularly ominous given that European Union leaders, when they initially

agreed in July to a second, 109 billion ba ilout package for Greece, assumed a growth rate of 0.6

percent. With the recession now set to continue for at least another year, the country will likely

need significantly more funding. Germany's parliament is set to vote on that ba ilout package this

month.

In addition, European banks, which agreed in July to a 21 percent writedown in the value of their

Greek debt holdings, may end up suffering much larger losses. "Greece is bankrupt," said Michael

Fuchs, deputy floor leader in parliament for Merkel's Christian Democrats, in comments to the daily

Rheinische Post. "Probably there is no other way for us other than to accept at least a 50 percent

haircut on its debt."

Deutsche Bank head Josef Ackermann, however, warned against revisiting the voluntary

agreement. "If we reopen the voluntary accord of July 21, we will not only lose precious time, but

quite possibly also private-sector support," Ackermann told the Greek daily Kathimerini.

Last week, markets rose on hopes that Europe was preparing to vastly expand the EFSF beyond

the 440 billion it has already committed to. Alternately, there was ta lk of "leveraging" the fundby using its current assets as collateral to borrow up to 2 trillion. Several denials from Germany

in particular would seem to have put a damper on such hopes. But according to Olli Rehn,

Europe's commissioner for economics and monetary affairs, finance ministers meeting on Monday

in Brussels are set to discuss ways to leverage the fund, suggesting that Germany's "nein" has

not been unconditional.

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Europe, Rehn said on Monday, faced a three-pronged challenge of "sta lling growth, stressed

sovereigns and still vulnerable banks." Euro-zone ministers were not expected to make any

decisions on Monday.

A Complete Standstill

Still, many remain convinced that Europe needs to take drastic action to get its debt crisis under

control. Austan Goolsbee, the chairman of Barack Obama's Council of Economic Advisors who

recently resigned, told SPIEGEL in an interviewthat Europe needed to focus on rapidly

recapitalizing European banks to avoid a deep financial crisis once Greece defaults. "If Europe

does not deal with the problem of undercapitalized banks, it could easily blow up and turn into

another worldwide conflagration," he said.

Magnifying the problem are indications that the euro-zone economy is already suffering w ith a

steep drop in export demand hitting several economies hard. According to the Manufacturing

Purchasing Managers Index, a survey carried out by Markit of euro-zone purchasing managers

and an important measure of factory activity, manufacturing shrank last month at a pace not seen

since the middle of 2009. Germany too has seen a significant slowdown with manufacturing

growth having all but come to a complete standstill.

cgh -- with wire reports

URL:

http://www.spiegel.de/international/europe/0,1518,789656,00.html

RELATED SPIEGEL ONLINE LINKS:

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(10/03/2011)

http://www.spiegel.de/international/world/0,1518,789636,00.html

America's Debt Crisis: Why Europe Is Right and Obama Is Wrong (10/03/2011)

http://www.spiegel.de/international/world/0,1518,789624,00.htmlNational Governments Can't Be Trusted: Barroso Calls for More Power for EU

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Merkel Breathes Sigh of Relief: German Parliament Passes Euro Fund Expansion

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Rescuing the Euro: The Fatal Mistakes of Berlin's Bailout Strategy (09/23/2011)

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'We Won't Pay': Greece's Middle Class Revolt against Austerity (09/23/2011)


Berlin and Paris Battle Contagion: The Weakness Behind Sarkozy's European

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