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Greek Recession Complicates Efforts To Emerge From Debt Crisis

Greek Debt Crisis

First Posted: 10/03/11 09:20 AM ET Updated: 12/03/11 05:12 AM ET

The Greek economy will remain stuck in recession next year, underlining the challenge the country faces in creating enough growth to claw its way out of a debt crisis shaking the euro, Greek budget figures showed on Monday.

Gross domestic product (GDP) is seen contracting by 2.5 percent next year from a 5.5 percent slump in 2011, according to the country's 2012 budget draft, which was submitted to parliament after agreement with international inspectors.

Those numbers are in line with recent forecasts by the IMF, but much worse than predictions used in July to calculate a second, 109 billion euro rescue package which anticipated 0.6 percent growth in 2012, putting an end to three consecutive years of recession.

Greece's Finance Minister Evangelos Venizelos said the budget draft marked a key transition from deficits to surpluses, excluding the country's huge debt service costs.

"The 2012 budget completes an intense and difficult effort of fiscal adjustment, reaching a primary surplus of 3.2 billion euros in 2012 from a primary deficit of 24 billion in 2009," he said in a statement.

However, if Greece's international lenders, also known as the "troika," conclude in a report to be issued this month that recession will continue to be worse than predicted, EU officials have suggested that banks that agreed in July to write off 21 percent of the value of their Greek debt holdings may be forced to take deeper losses.

The country's debt is expected to rise to nearly 173 percent of GDP next year from about 162 percent in 2011, the budget draft said. Greek growth is a key factor in determining whether this debt is viable or whether the country will have to default.

BUDGET TARGETS

Greece late on Sunday admitted it would miss its budget targets for this year and decided on fresh austerity measure to meet a new, revised target for 2012.

The budget plan predicts a deficit of 8.5 percent of gross domestic product for 2011, well off the 7.6 percent target. Tough measures, including a new property tax and public sector firings aim at narrowing the budget gap to 6.8 percent of GDP in 2012, a new target, slightly higher than a previous 6.5 percent goal agreed with the inspectors in July, due to a deeper recession.

Greece's EU/IMF inspectors are still combing through the debt-laden country's books and have not yet agreed to pay out a lifeline bailout tranche of 8 billion euros under its ongoing 110 billion euro rescue plan, agreed last year.

Greece's deputy economy minister Pantelis Oikonomou said on Monday that talks with the troika had essentially concluded. But sources with direct knowledge of the talks dismissed the statement, saying they were far from over.

"The talks are not over," one official with direct knowledge of the talks told Reuters. The inspection team was still examining Greece's budget numbers and other reforms required for the disbursement of the aid.

Oikonomou had earlier said that Greece had convinced its lenders the fiscal slippage was due to a deeper than expected recession and that the troika would start drafting its report on Wednesday, after two more visits at the country's General Accounting Office to cross-check some numbers.

"I believe we have essentially concluded," Oikonomou told television station Mega. "To the extend that they (the troika) are convinced that the recession is really deeper, I believe we have figured things out," Oikonomou said.

(Writing by Harry Papachristou; Editing by Toby Chopra.)

Copyright 2011 Thomson Reuters. Click for Restrictions.

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