Greece and Portugal debts worse than expected

Phillip Inman

A demonstrator shouts slogans against the government and the IMF during a march in Lisbon this week to mark the anniversary of the country's 1974 Carnation Revolution, which put an end to 48 years of dictatorship. Photograph: Rafael Marchante/Reuters
Greece and Portugal are deeper in debt than previously estimated, according to official figures that show attempts to contain their financial woes have so far failed.

The statistics agency Eurostat said Greece's deficit hit 10.5% of economic output in 2010, well above the 9.6% the European commission expected last autumn. Portugal, which is negotiating a bailout similar to those for Greece and Ireland, saw its debts reach 9.1%, far ahead of the 7.3% the commission used as a benchmark until only a few months ago.

The rise in the annual debt levels are a blow to efforts in Brussels to ease growing fears among investors that Greece will be overwhelmed by its financial situation and default on hits debt.

The country had to be saved from bankruptcy with €110bn (£98bn) in rescue loans last May, but continues to struggle to raise revenue as its economy shrinks.

Most economists consider a Greek default a foregone conclusion, with either some debt forgiveness or a radically longer timetable of repayments. They argue only about the timing.

Ben May, of research house Capital Economics, said a Greek default was inevitable but unlikely to happen this year. He believes the EU will keep the country afloat until a multibillion-euro bailout fund, known as the European Stability Mechanism, becomes available in 2013.

At the weekend a prominent member of the European Central Bank said a Greek debt restructuring would be a disaster for the eurozone with knock-on effects on banks in France, Britain and Germany that hold Greek debt.

"A restructuring would have legal and systemic consquences that are difficult to calculate right now but would in all probability be bigger than after the collapse of Lehman Brothers," said José Manuel González-Paramo, an ECB executive board member.

Prominent figures such as the International Monetary Fund boss Dominique Strauss-Kahn have insisted the Greeks will honour their commitments to repay.

However, one adviser to German chancellor Angela Merkel hinted that Greece's escalating debts could bring forward the need for a bailout.

"I don't think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future," Lars Feld, a member of the German prime minister's council of economic advisers, told the news service Bloomberg. "Greece should restructure sooner rather than later."

Investor concerns pushed Greek bond yields to record highs with two-year bonds adding 64 basis points, or 0.64 percentage points, to 23.6%, while yields on 10-year bonds reached 15.26%. Portugal's two-year bond yields touched 11.6%, before easing to 11.5%.

EU officials said there were reasons to be cheerful following a decline in the average debt across the 17 member eurozone from 6.3% in 2009 to 6%. A majority of countries managed to repay some of their debts over the last year.

The Greek finance ministry attributed the larger deficit to a deeper than expected recession, which cut into tax revenues and social security contributions. It conceded more needed to be done to stop tax and social security evasion and cut costs in hospitals, local administration and public enterprises.

"The Greek government remains committed to achieving its deficit targets under the economic adjustment programme and will take all necessary measures in that direction," the ministry said in a statement. The government has already revealed plans to cut an extra €23bn in expenditure by 2015 and privatise €50bn in public assets.

Its failure to impose tax rises and spending cuts has sent the country's debt spiralling to 142% of national income. Portugal's total has reached 93% of GDP. Ireland's hit 96%, Italy's 119% and Belgium's 97%. Britain's annual debt of 10.5% last year pushed its total to 80%, compared with Germany's 83% and France's 82%.

There was some good news for Spain, the country that most analysts view as the next weakest link in the eurozone. Its deficit was 9.2% of GDP, slightly below the 9.3% forecast by the commission.

Investors are more concerned about the control governments are exercising over spending than their total debts. Italy has persistently spent more than it earned, but has kept its overspending low during the financial crisis, mainly because its banks stayed clear of the exotic financial instruments that rocked so many European banks. Guardian