Greece Faces Bond Rout as Budget Deficit Worsens, Greek Workers Strike

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Protestors stand in front of the Greek Parliament in Athens, on April 22, 2010. (Bloomberg)

April 22 (Bloomberg) — The European Union said Greece’s budget deficit last year was worse than previously forecast and may top 14 percent of gross domestic product, fueling investor concern about a default and sending its bond yields soaring.

The EU’s statistics office said Greece’s deficit was 13.6 percent of GDP last year, topping the government’s two-week-old forecast of 12.9 percent and the EU’s November prediction of 12.7 percent. “Uncertainties” about the quality of the Greek data may lead to a further revision of as much of 0.5 percentage point, Luxembourg-based Eurostat said.

Greece’s benchmark 10-year bond yield rose to 8.49 percent, the highest since 1998 and more than twice the comparable German rate. The cost of insuring government debt against default climbed to a record today.

Greece’s widening deficit and questions about the accuracy of its economic data have undermined the credibility and enforcement of the EU’s budget rules and contributed to the 6.9 percent slide in the euro this year. The EU and the International Monetary Fund offered Greece as much as 45 billion euros ($60 billion) in emergency loans to assure investors the country can make its debt payments and shore up the euro.

Breaking the Rules

“They have played against the rules and now they’re getting the bill,” said Sylvain Broyer, chief European economist at Natixis in Frankfurt. “It’s a very uncomfortable situation for the Greek government. Greece has very much benefited from the currency region, but ignored the rules.”

Prime Minister George Papandreou has raised taxes and cut spending and wages to reduce the shortfall by 4 percentage points of GDP to 8.7 percent this year, and has pledged to bring the gap within the EU’s 3 percent limit by the end of 2012. Greece still plans to cut the deficit by more than 4 percentage points this year, the Finance Ministry said today in a statement after the revision. The statement didn’t say whether the 8.7 percent target was still achievable.

Deficits have surged across Europe after governments were forced to bail out banks and spend on stimulus to fight the worst recession in 60 years. Greece’s shortfall last year was more than four times the EU limit, though it wasn’t the region’s biggest. Ireland’s budget gap was revised up to 14.3 percent, the largest for any country since the start of the euro in 1999, Eurostat said today.

Credibility Gap

Greece continues to be dogged by questions about the reliability of its data after repeated revising its economic reporting since entering the euro in 2001. In January, the European Commission, the EU’s executive arm, cited “severe irregularities” in the country’s data, and Greece responded by making its statistics agency independent of government control.

“Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps,” today’s report said.

Eurostat was referring to swaps arranged by Goldman Sachs Group Inc. for Greece in 2002 that are now under investigation by the EU. The country entered a cross-currency swap with Goldman Sachs on about $10 billion of debt issued in dollars and yen. That was swapped into euros using a historical exchange rate, a mechanism that generated about $1 billion in an up-front payment from Goldman to Greece, helping lower both the deficit and the debt. Goldman has said it did nothing wrong.

To contact the reporter on this story: Andrew Davis in Rome at [email protected]

Last Updated: April 22, 2010 07:49 EDT

Source: Bloomberg

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