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EU inspectors press Greece for action

Source: Reuters - Thu 25th Feb 2010

European Union inspectors and rating agencies piled pressure on Greece on Thursday as it prepares to tap markets with a new bond while battling a debt crisis that threatens to destabilise the euro zone.

EU inspectors visiting Athens have told authorities they see a deeper than expected recession and higher borrowing costs hindering Greece in meeting its deficit-cutting targets, key for agencies ahead of any rating decisions and for EU partners fearing contagion.

"Negotiations (on measures to cut Greece's deficit) continue because they see a big slippage in targets" said a senior Greek finance ministry official who declined to be named.

The inspectors anticipate Greece will only be able to cut its deficit-to-GDP ratio by 1.5-2.0 percentage points compared with a 4 percentage points target this year, he said.

This would mean additional measures aimed at savings of about 4.8 billion euros (4.32 billion pound). The official said any further steps would be announced after a visit by European Economic Affairs Commissioner Olli Rehn to Athens next week.

Greece shocked EU peers and markets when it revealed after October elections its budget deficit would come to 12.7 percent of GDP in 2009, four times the EU limit.

Rating agencies downgraded Greek debt and the premium investors demand to hold Greek over German bonds rose, increasing borrowing costs and exacerbating fiscal woes. The spread was at about 350 basis on Thursday.

Boosted by solid public support for tough measures despite disruptive strikes, Athens has pledged to cut the gap by four percentage points this year and below 3 percent of GDP by 2012. It has announced an EU-backed plan of public sector salary cuts, tax hikes and social security reforms to meet its goals. 


But a team of European Commission, ECB and IMF inspectors visiting Athens this week to assess progress in dealing with a debt crisis ahead of a mid-March deadline saw tough times ahead.

The economy contracted by 2 percent last year, worse than the 1.2 percent expected, as Greece dove deeper into its first recession in 16 years. Higher borrowing costs, low absorption of EU funds and over-ambitious targets from fighting rampant tax evasion also complicate efforts.

Greece's EU-backed fiscal consolidation drive is being closely watched by the three main rating agencies, which have all said further downgrades are possible if the country fails to stick to its reform plans.

Fitch ratings told Reuters in an interview on Thursday it was keeping Greece's BBB+ rating unchanged and maintaining a negative outlook, with an eye on any extra measures by mid-March and the success of an upcoming bond issue.

Athens is readying to issue a 10-year bond, its second debt sortie this year, and officials have indicated it aims to do so in February or early March. The country needs to raise about 20 billion euros to cover maturing debt in April and May.

Moody's Investors Service said on Thursday any changes in its Greek rating would depend on whether Athens was smoothly enacting its fiscal reform plans as promised.

Standard and Poor's said on Wednesday it may downgrade Greece's BBB+ rating by one or two notches within a month, citing downside risks to growth that could hinder the country's deficit-cutting plan.

EU partners are concerned the Greek debt crisis, which has pressured the euro, may spread to other countries on the euro zone periphery. The German debt management agency head told Reuters Insider Television this was an acid test for the group.

"I think if one of the 16 members would default, it would be a collapse of the whole system" German Finance Agency managing director Carl Heinz Daube told a bond conference in London.

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