Civil servants strike, markets punish Greece as deficit turns out worse than expected

Greek debt crisis worsens as EU revises figures

ATHENS, Greece — Markets pushed Greece closer to an expensive bailout after the EU raised its estimate of the country’s budget deficit Thursday and a top agency downgraded Greece’s credit rating. The twin moves caused the heavily indebted nation’s borrowing costs to spike to unsustainable levels.

So far, Greece’s Socialist government has insisted it prefers to tap bond markets for its borrowing requirements and avoid using a joint eurozone-International Monetary Fund rescue package, the details of which are being hammered out in talks that began in Athens on Wednesday.

But with investors demanding punishingly high interest rates — over 8.7 percent for 10-year bonds Thursday afternoon — the chances that Greece will get by without a rescue seem increasingly remote.

“Greece is in the midst of another hellish week and now faces no choice but to seek to formally activate the European rescue package,” said Ben May, European economist at Capital Economics. “While this may help to ease the markets’ frazzled nerves, the latest upward revision to the 2009 budget deficit highlights the mammoth task ahead.”

The European Union’s statistics agency Eurostat revised Greece’s budget deficit in 2009 to 13.6 percent of gross domestic product from 12.9 percent, and said it could be further revised by up to 0.5 percentage points.

The level is more than four times the EU limit set for the 16 countries that use the euro, which has been badly hit by the Greek financial crisis. Athens insisted its target of reducing its deficit by at least 4 percentage points in 2010 remained unchanged.

“It is clear that the Greek situation is a very serious one,” IMF chief Dominique Strauss-Kahn said in Washington, where he is to meet with Finance Minister George Papaconstantinou on Saturday. “There is no single way, no silver bullet to solve it in an easy manner.”

Strauss-Kahn said the IMF was not considering any restructuring of Greek debt that would make holders of the debt accept something less than full value for their loans. That worry has roiled markets in recent days.

He said talks with the government in Athens over the details of the eurozone-IMF support package would take time to complete. Athens has said it expects them to last for about two weeks.

Eurostat’s revision came as Greek civil servants held a 24-hour strike that disrupted public services, shut down schools and archaeological sites and left state hospitals working with emergency staff. Protesters from a Communist-backed trade union blockaded Athens’ main port of Piraeus, disrupting ferry services.

But demonstrations in Athens were far smaller than those of other recent strikes, with just 3,000-4,000 protesters marching through the city center. Greek airports also remained open after air traffic controllers pulled out of the strike because of the travel chaos caused by Iceland’s volcanic ash cloud.

Later Thursday afternoon, Moody’s Investor Services downgraded its rating on the country’s debt by one notch to A3 from A2, and warned that further downgrades were possible.

“This decision is based on Moody’s view that there is a significant risk that debt may only stabilize at a higher and more costly level than previously estimated,” the agency said.

Eurostat’s revisions and the Moody’s downgrade sent Greece’s borrowing costs skyrocketing to alarming levels. The interest rate gap, or spread, between Greek 10-year bonds and German ones — considered a benchmark of stability — spiked to 5.86 percentage points.

The high rates reflect market concern about the country’s ability to pay back its debts. A default by a eurozone country would be a serious blow to the euro, which also has other members who face financial woes — notably Spain, Portugal and Ireland.

The spreads translate into prohibitive interest rates that Greece cannot endure for long — making it increasingly likely Athens will ask to make use of the three-year aid package which would provide the country with much-needed cash at lower rates and prevent a default.

German Finance Minister Wolfgang Schaeuble, whose country has been extremely reluctant to provide a bailout for Greece, indicated he does not believe Athens will ask for assistance before mid-May.

Asked in an interview with Deutschlandradio broadcaster whether he thought Greece would ask for the rescue package before mid-May, Schaeuble replied “I don’t think so.”

Struggling to cope with a debt of euro300 billion ($406 billion), Greece needs to borrow about euro54 billion ($72 billion) this year alone, with about euro10 billion of that next month. It has euro8.5 billion worth of 10-year bonds maturing on May 19.

Prime Minister George Papandreou said his country was going through an “unprecedented crisis … a crisis the likes of which no other government has faced in the past.”

The government’s duty, Papandreou said during a Cabinet meeting, “is to take every decision which prevents the worst for Greeks, every decision which solves problems that for decades we preferred not to touch, every decision which serves the national interest.”

He stressed that the rescue package would provide euro30 billion ($40 billion) in bilateral loans from other eurozone countries “if and when it is needed.” The package would also provide about euro10 billion ($13.3 billion) from the IMF, bringing the total to at least euro40 billion ($53 billion) for this year — more than Greece needs at this stage.

Greek officials have said the plan could provide a total of about euro80 billion over three years.

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AP Business Writer Pan Pylas in London, Economics Writer Martin Crutsinger in Washington and Melissa Eddy in Berlin contributed to this story.