Greek Deficit Tops Forecasts as Merkel Aide Says Debt Must Be Restructured

Greece’s budget deficit exceeded goverment estimates and the euro area’s overall debt reached a record, narrowing Europe’s options for putting an end to the fiscal crisis.

Greece’s shortfall was 10.5 percent of gross domestic product in 2010, higher than a 9.4 percent estimate made by the Greek government in February, official European Union figures showed today.

Greek bond yields surged, rekindling speculation that a debt write-off or extension of the country’s repayment timelines will be the only way out of the fiscal trap.

“I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future,” Lars Feld, a member of the German government’s council of economic advisers, told Bloomberg Television’s Nicole Itano in Frankfurt. “Greece should restructure sooner than later.”

Two-year Greek yields rose as much as 64 basis points to 23.65 percent, before slipping back to 23.41 percent as of 11:13 a.m. in London. Ten-year yields reached 15.26 percent. Portugal’s two-year note yields touched 11.62 percent, before easing to 11.53 percent. All of the yields reached records.

Default Risk

The cost of insuring debt sold by Greece and Portugal rose to records, according to traders of credit-default swaps. Contracts on Greece jumped 13 basis points from April 21 to 1,345 basis points, signaling a 66 percent chance of default within five years, according to CMA. Portuguese swaps climbed six basis points to 666.

Greek Prime Minister George Papandreou’s government has ruled out a restructuring, saying it would devastate domestic banks and hammer an economy that shrank 4.5 percent last year.

Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid.

A buildup of debt is making it harder for wealthier countries to aid the fiscally weaker states along Europe’s periphery. Debt rose in all 16 countries using the euro last year to 85.1 percent of GDP from 79.3 percent in 2009, today’s Eurostat report showed.

European Debt

Aggregate euro-area debt moved closer to the 90 percent level that economists Kenneth Rogoff and Carmen Reinhart say can weigh on long-term growth prospects.

A political backlash is already under way in AAA rated countries such as Finland, where an anti-euro party is set to enter government after finishing third in elections this month. German Chancellor Angela Merkel’s poll ratings have also suffered as the bill for bailing out deficit-hit states mounts.

Greece’s debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history, the EU figures showed. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP.

Greek bond yields have soared since April 14, when German Finance Minister Wolfgang Schaeuble was quoted as saying Greece may need to restructure its debt, breaking with the official stance of European governments and the European Central Bank.

A debt restructuring by a euro country risks triggering a banking crisis that in a “worst case” scenario could do more damage than the failure of Lehman Brothers Holdings Inc., ECB Chief Economist Juergen Stark told ZDF German television on April 23.

Recession Impact

Greece said the worse-than-expected recession was responsible for the wider deficit, while noting that it cut the deficit by 4.9 percentage points, more than any other euro country.

A deterioration of tax revenue and worsening finances at local governments, social-security funds and public hospitals also contributed to the wider deficit, the Greek Finance Ministry said in an e-mailed statement.

Feld, the German government adviser, said there is a consensus among most economists that a Greek restructuring is inevitable.

Germany “is currently not willing to support a Greek restructuring and when you look at the ECB and also the German representatives in the ECB, they’re not supporting a Greek restructuring as well,” Feld said.

Under pressure from Germany to tighten the screws on budgets, euro-area countries pared their overall deficit to 6.0 percent of GDP in 2010 from 6.3 percent.

Germany wasn’t among the 12 countries with lower deficits. The German shortfall widened to 3.3 percent from 3.0 percent, edging back over the limit for euro users.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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