Greek, Portuguese, Irish Debt Seen Topping GDP This Year

May 15, 2011, 11:03 AM EDT By Andrew Davis

(Updates with economist quote in fourth paragraph.)

May 13 (Bloomberg) -- Greece, Ireland and Portugal, the euro region countries that needed 256 billion euros ($366 billion) in emergency aid to avoid default, may all see their debt loads exceed the size of their economies this year.

Greece’s debt, already the biggest in the euro’s history at 143 percent of gross domestic product last year, will jump to almost 158 percent this year and 166 percent in 2012, the European Commission said today in Brussels. Portuguese debt will surpass total economic output for the first time this year, growing to 101.7 percent of GDP, while Irish debt will reach 112 percent, the forecasts show.

As European Union officials consider boosting aid for Greece a year after its 110 billion-euro bailout, today’s report shows little sign of debt levels becoming more manageable. Soaring borrowing costs have left the three nations shut out of financial markets with investors increasing bets that Greece will become the first euro member to default.

“The market has realized that there are no short term solutions particularly for Greece and Portugal and some kind of restructuring is likely in the end,” said Marco Valli, chief euro-region economist at UniCredit Global Research in Milan.

“The debt dynamics are very difficult to sustain. You need to completely

The cost of insuring Greece debt against default reached a record 1,371 on May 9, and its two-year bonds now yield 24.7 percent, almost 10 percentage points more than its 10-year debt, indicating investors may recover only a fraction of their principal.

Deficit Forecasts

The European Commission also raised its deficit forecasts for all three countries and predicted that the economies of both Greece and Portugal will shrink this year as the austerity measures choke growth needed to finance deficit reduction. Greece’s economy did expand 0.8 percent in the first quarter, snapping five straight contractions, separate data showed today.

After more than a year of austerity, which included higher taxes and cuts in wages and pensions, Greece’s budget deficit was still at 10.5 percent of GDP last year. The shortfall will narrow to 9.5 percent of GDP this year and 9.3 percent next year, still three times the EU limit of 3 percent.

“Greece is facing a very serious situation,” EU Economic and Monetary Affairs Commissioner Olli Rehn said at a briefing. “Because of weaker growth last year than expected and the burden of that, there’s a need to take additional measures of fiscal consolidation.”

‘Devastating Implications’

The European Commission and European Central Bank have stepped up opposition to a restructuring of Greece’s debt. Rehn warned on May 11 that such a move would have “devastating implications” for the country and the euro area as a whole. Euro-region finance chiefs meet in Brussels on May 16 and will discuss additional aid for Greece that would allow it to avoid trying to return to markets and sell 27 billion euros of debt next year as envisioned under the bailout plan.

“Sooner or later Greece will have to restructure,” Patrick Moonen, a senior equity strategist at ING Investment Management, said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

At the same time, Europe’s donor nations insist that Greece will need to meet tougher conditions than last year to win more funds. An EU and IMF delegation is currently in Athens, conducting the fourth quarterly review of the government’s deficit-cutting program.

Irish Shortfall

Ireland’s deficit, the biggest in the history of the euro region last year at more than 32 percent, is forecast to fall to 10.5 percent this year. Portugal, where the economy contracted 0.7 percent in the first three months, will have a 5.9 percent deficit, the commission said.

Greece’s Finance Ministry blames the deeper-than-forecast recession for the government’s failure to meet its 9.4 percent deficit target last year and for a 1.9 billion-euro revenue shortfall in the first four months of 2011. Record unemployment of 15 percent and an inflation rate of almost 6 percent have damped consumer and business spending.

Greek GDP contracted 4.5 percent last year. The economy is forecast to shrink 3.5 percent this year, according to today’s report.

The government next week will submit to parliament a 76 billion-euro package of spending cuts and asset sales to help meet its fiscal targets. About 18,000 demonstrators attended union-organized marches on May 11 to protest the measures.

--With assistance from Marcus Bensasson in Athens and Alessandra Migliaccio in Rome. Editors: Craig Stirling, Fergal O’Brien

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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