Greek deficit to exceed target in 2011

January 11, 2012 - 6:00 AM

LAGONISSI, Greece (AP) — Debt-crippled Greece's budget deficit is expected to hit 9.6 percent of economic output in 2011, about half a percentage point above target, the development minister said Wednesday.

Michalis Chryssochoidis said that an increase in the use of European Union structural development funds had contributed to lowering government overspending from 10.6 percent of gross domestic product in 2010.

"The good news is that absorption of European Union funds has exceeded all expectations," Chryssochoidis said at an economic forum where the government hopes to attract investment from the United Arab Emirates.

But Greece, which is relying on billions in rescue loans from its European partners and the International Monetary Fund to keep afloat, had pledged to cut the 2011 deficit to 9 percent of GDP.

Greece ran up high budget deficits for years, building a suffocating debt load set to exceed 160 percent of GDP in 2011. In exchange for a vital euro110 billion ($140 billion) international bailout in May 2010, the country implemented a harsh austerity program, slashing pensions and salaries while repeatedly hiking taxes and raising retirement ages.

The country's interim coalition government is rushing to pass a new batch of reforms and cutbacks, to secure a second, euro130 billion bailout package approved in October but not yet finalized.

Fitch Ratings warned on Wednesday that Greece's financial troubles could still worsen the eurozone crisis if it can't work out a debt reduction deal with creditors, part of the second bailout package.

Fitch's head of sovereign ratings David Riley said Greece "still has lots of potential to plunge Europe into crisis" and that "time is running out."

Greece is in talks with private investors about a voluntary 50 percent reduction in their Greek bond holdings.

It needs to agree the deal before it can get another installment in its rescue loans, which it will need to repay euro14 billion in bonds that come due in March.

Riley said one complicating factor in the private creditors' deal was the European Central Bank's refusal to write down its estimated euro45 billion in Greek bonds. That means private bondholders have to be asked to take on more losses to reach a given reduction in Greece's debt load.

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David McHugh in Frankfurt contributed to this report.