Global markets, lenders slip on Greece

[You must be registered and logged in to see this image.]




ATHENS: Greece's admission that it will miss its fiscal deficit target this year, despite ever deeper cost-cutting measures, provoked a sharp sell-off in stock markets on Monday and raised new doubts over a planned second international bailout.

The gloomy news from Athens brought the specter of a debt default closer and weighed on talks among euro zone finance ministers in Luxembourg about the next steps to try to resolve the currency area's sovereign debt crisis.

European bank shares suffered the heaviest falls on fears that private sector bondholders may be forced to absorb bigger losses than agreed in a July rescue plan for Greece that was based on more optimistic growth forecasts.

The worst performing bank was Franco-Belgian group Dexia, whose shares fell 10 percent on concerns over its heavy Greek exposure and after Moody's said liquidity problems could lead to a downgrade of its credit rating.

Greece's draft budget sent to parliament on Monday showed the current year's deficit would be 8.5 percent of gross domestic product, well above the 7.6 percent agreed in Greece's EU/IMF bailout program, the benchmark for future EU aid.

Finance Minister Evangelos Venizelos said the 2012 fiscal targets would be met in absolute terms and Greece would have a primary surplus before debt service for the first time in many years. That may be enough to convince the troika that the next 8 billion euro tranche of aid to Athens can be paid.

However, next year's deficit is projected to be 6.8 percent of GDP, rather than the 6.5 percent EU/IMF goal, because the economy is set to shrink by a further 2.5 percent after a record 5.5 percent contraction in 2011.

A deeper-than-forecast recession means public debt will be equivalent to 161.8 percent of GDP this year, rising to 172.7 percent next year, by far the highest ratio in Europe.

Deputy Finance Minister Pantelis Oikonomou said the European Union and International Monetary Fund inspectors had "essentially concluded" negotiations to give Greece the 8 billion euro installment this month to avert bankruptcy.

However, a source familiar with the review by the "troika" of international lenders said the talks were not over, and the inspectors were still examining both the budget numbers and other reforms required for the loan disbursement.

"Speculating about it in advance makes no sense," German Finance Minister Wolfgang Schaeuble said in Luxembourg. But Belgium's finance minister, Didier Reynders, was more optimistic, saying he hoped the money would be paid in days.

"I hope that today, or in the next few days, we will take the decision to disburse the next tranche (of money) to Greece. Greeks are making important efforts and the euro zone should also do its job and vote to approve the texts," he said.

The 17 euro zone ministers will not take any decision on Monday on releasing the funds, needed to pay October salaries and pensions, since the troika has yet to report back. They are set to decide at a special meeting on October 13.

The likelihood that Greece's funding needs next year will be greater than forecast in July, when a second 109 billion euro rescue package was agreed in principle, reopened a fraught battle over who should pay -- taxpayers or financiers. (Reuters)