Greece on track but debt doubts now raised over Belgium as eurozone crisis deepens

News - Banking

Written by Ray Clancy

Greece is on track and has made significant progress to reduce her fiscal deficit, according to the latest review by the International Monetary Fund, the European Commission and the European Central Bank.

But now eyes are being cast in the direction of Belgium as the next European country to be dragged into the economic crisis sweeping through the eurozone and follow Ireland into being forced to ask for a bailout because its debt is equivalent to 100% of its GDP.

Not only is Belgium in political crisis since the collapse of its government in April, but its recent austerity package is now regarded as not strong enough and financial speculators are said to be eyeing the value of its bonds.

While Spain and Portugal are the analysts’ favourites to be next to seek financial aid, Belgium is also seen as vulnerable.

However, Portugal’s finances are regarded as so insecure that a German newspaper claimed eurozone states were keen for Lisbon to seek outside aid in order to avoid Spain following suit and triggering a larger crisis.

‘If Portugal were to use the fund, it would be good for Spain, because the country is heavily exposed to Portugal,’ the FT Deutschland quoted a source in Germany’s finance ministry as saying.

A Portuguese government spokesman labelled the newspaper report as ‘completely false’ but fears are mounting that the £635billion rescue fund set up by the European Union and International Monetary Fund may not be big enough to cope.

German chancellor Angela Merkel has this week repeated calls for a permanent crisis fund.
‘We now have a mechanism of collective solidarity for the euro. And we all are ready, including Germany, to say that we now need a permanent crisis mechanism to protect the euro,’ she said.

And even though Greece is making progress, the country is by no means out of the financial mire yet. The second review of the government’s economic programme points out that challenges remain even though significant progress has been made, particularly in reducing the fiscal deficit.

It predicts that the Greek economy is expected to begin turning around in 2011. Wage and price inflation is beginning to moderate, setting the stage for improvements in competitiveness and the deficit reduction by 6% of GDP in 2010 is larger than the initially targeted change.

‘At the same time, data revisions for 2009 and weaker than projected revenue collection mean that an extra effort will be needed to meet the deficit target of 7.5% of GDP in 2011, which the government has reaffirmed. New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of health spending which is inefficient relative to other euro zone countries and state enterprises which are a heavy burden on the economy with perennial losses for Greek taxpayers,’ the spending review report says.

The Greek government’s medium term budget strategy paper, to be discussed in the next review, will specify time bound action plans for crucial structural reforms needed to achieve the remaining fiscal adjustment, and to do so in a socially balanced way.

It also says that the activation of the €25 billion expansion of the government programme to guarantee bank bonds, which was adopted in August, will contribute to support the liquidity position of Greek banks. Some private banks have had some success recently in raising funding as well as capital in the markets. While the banking system remains under some pressure, capital is adequate.

Read the latest Investment International Eurozone Crisis report here