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, the
country'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 sink 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 awaiting 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 also says that the move
will 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 bailout 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 bailout 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 talk of "leveraging" the fund
by 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.

Europe, Rehn said on Monday, faced a three-pronged challenge of "stalling 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 interview that 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 with 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:
Former Obama Adviser: Euro Crisis 'Could Become a Global Conflagration'
(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.html
National Governments Can't Be Trusted: Barroso Calls for More Power for EU
Institutions (09/30/2011)
http://www.spiegel.de/international/europe/0,1518,789300,00.html
Merkel Breathes Sigh of Relief: German Parliament Passes Euro Fund Expansion
(09/29/2011)
http://www.spiegel.de/international/germany/0,1518,789074,00.html
Rescuing the Euro: The Fatal Mistakes of Berlin's Bailout Strategy (09/23/2011)
http://www.spiegel.de/international/germany/0,1518,788082,00.html
'We Won't Pay': Greece's Middle Class Revolt against Austerity (09/23/2011)
http://www.spiegel.de/international/europe/0,1518,787847,00.html
Berlin and Paris Battle Contagion: The Weakness Behind Sarkozy's European
Vision (09/21/2011)
http://www.spiegel.de/international/europe/0,1518,787369,00.html

SPIEGEL ONLINE 2011

All R ights R e se rve d
R e production only a llowe d with the pe rm ission of SPIEGELne t Gm bH