Greece Set to Get European Rebuke on Finances, EU Draft Shows

European Union finance ministers will reprimand Greece next week for failing to take “credible and sustainable” measures to reduce its toward the EU limit of 3 percent of output, a draft document shows.

Significant revenue shortfalls and expenditure overruns “led to a strong deterioration in Greece’s budgetary position in 2009, which can only partly be attributed to the deterioration of the macroeconomic conditions,” according to the document, obtained by Bloomberg News. They are “mainly due to an insufficient response by the Greek authorities.”

The document, prepared by a group composed of officials from the 27 EU nations, the European Central Bank and the European Commission, will be discussed by finance ministers at a meeting in Brussels on Dec. 1 and 2.

Unlike other euro-area nations, all of which will have deficits exceeding 3 percent of gross domestic product next year, Greece has yet to receive an extension to the 2010 deadline to cut its deficit below the ceiling. Greece’s economy will contract 0.3 percent next year, compared with growth of 0.7 percent in the euro-region as a whole, the EU forecast Nov. 3.

Greece, which has met the EU deficit limit only once since adopting the euro in 2001, revised its forecast for the shortfall from a 3.7 percent for this year to 6 percent in September. After Oct. 4 elections, which ushered in a new socialist government led by George Papandreou, the target rose to 12.7 percent, more than four times the EU limit, prompting Monetary Affairs Commissioner Joaquin Almunia to say Greece’s finances have become a “concern for the whole euro area.”

Rating Cut

The country’s credit rating was cut one step to A- by Fitch Ratings last month and Moody’s Investors Service placed the ratings on review for a possible downgrade after Greece increased the estimates for its deficit. European Central Bank President Jean-Claude Trichet has said the country’s finances and revisions of its economic data have dented its credibility.

The difference in yield, or spread, between 10-year Greek government bonds and equivalent-maturity German bunds widened 9 basis points today to 188, the biggest gap since June 9. Greece’s benchmark ASE stock index has fallen 18 percent in the past month, the largest slide among western European benchmarks.

Public finances deteriorated as many of the deficit-control measures adopted this year were never implemented. The government failed to control spending and was unable to make good on pledges to boost tax collection.

The EU opened its first investigation into Greece’s deficit in 2004 after a revision of data revealed that, contrary to previous indications, the deficit had exceeded the EU ceiling every year since the country adopted the euro.

The commission remains critical of Greek statistics, which are “manifestly inadequate,” the document said. Greece’s economic data from October 2009 still haven’t been validated due to commission queries over the figures, the report said.

The commission said Nov. 3 that Greece would make little progress in reducing its shortfall, estimating a deficit of 12.2 percent next year and 12.8 percent in 2011 on a “no- policy- change” basis. The government has said it will bring the shortfall down to 9.1 percent next year though a combination of tighter controls on spending and renewed vigor in collecting taxes and cracking down on evasion.

Finance Minister George Papaconstantinou is seeking to convince the EU to grant Greece an extension to the 2010 deadline for meeting the 3 percent deficit target. That may occur after the commission evaluates the new socialist government’s budget and mid-term economic plan, due in January.