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Greek budget deficit grows despite austerity drive

11 July 2011, 21:44 CET
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(ATHENS) - Debt-hit Greece's budget deficit grew by 27.9 percent in the first quarter of 2011 despite over a year of austerity efforts, the finance ministry said on Monday.

The ministry said state finances were over two billion euros adrift with a recorded shortfall of 12.78 billion euros ($18.0 billion) instead of a targeted 10.37 billion euros.

Fiscal revenue was down by 8.3 percent compared with the same period last year while expenditure has increased by 8.8 percent, it added.

The state deficit is a big component of the critically important public deficit as measured by EU standards.

The ministry said the country's interest payments had increased by 1.28 billion euros to over seven billion euros, while another 429 million euros had been set aside to settle old hospital debts.

The state had also lost money to increased tax returns, up 19.7 percent from last year, it said.

The announcement came as European Union leaders held talks in Brussels amid mounting signs that the eurozone debt crisis was spreading to major EU economies, Italy and Spain.

The talks were expected to focus on the prickly issue of private-sector involvement in a second bailout of Greece after last year's 110-billion-euro ($157-billion) rescue package from the EU and the International Monetary Fund, a deal not expected before September.

But there is discord in the eurozone over how to bring banks and other private creditors to bear a share in a new rescue, without triggering a default which would ripple across the single currency area.

Prime Minister George Papandreou's Socialist government has fought hard -- politically in parliament but also on the streets against protesters -- to secure approval of a 28.4-billion fiscal plan demanded by the country's creditors in return for more aid.

Greeks are angry that an austerity recipe tightly monitored by the EU and the IMF has failed to pull the economy out of a vicious tailspin.

A series of general strikes and protests have been held against the government's economic measures, many of them marred by violence.

European leaders have been working for weeks on drawing private bondholders into a new Greek rescue tipped as almost as big as last year's 110-billion-euro bailout.

The plan has the backing of key global finance group, the Institute of International Finance (IIF), which represents banks, insurers and investment funds. It held closed-door talks in Europe last week.

But the European Central Bank has warned that if private sector involvement led ratings agencies to declare Greece in default, it could no longer accept Greek government debt as collateral for loans to Greek banks.

That would constitute a severe blow to the Greek banking sector that heavily relies on ECB money.

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