03/10/2011 17:32 BST | Updated 03/12/2011 10:12 GMT

Eurozone Crisis: Greece Misses Key Deficit Target

Greece has missed a key condition of its bailout package, rattling financial markets and adding to fears that the country will not receive essential aid from the EU and IMF.

The Greek government said that its deficit would hit 8.5 per cent of gross domestic product (GDP) against the 7.6 per cent target set in the bailout agreement with the EU and International Monetary Fund (IMF).

European markets fell in Monday trading after the news. The FTSE 100 fell just over one per cent, while the German DAX and French CAC40 indices fell by 2.28 per cent and 1.85 per cent, respectively.

The “Troika” of the IMF, European Union and European Central Bank, which agreed a second, €109 billion (£93 billion) bailout of Greece on July 21, is currently examining whether or not Greece has met the terms of its aid before disbursing an €8 billion tranche. A mission from the Troika returned to Greece last week, after earlier leaving the country having failed to reach an agreement with the government.

Greece risks bankruptcy if the payment is not agreed before the end of October.

Sovereign default is almost inevitable, but analysts now believe that Greece may hold out until December at the earliest. Policymakers want to make sure that there are sufficient mechanisms and funding in place to prevent the crisis from enveloping the rest of the eurozone.

“With little prospect of a bond default before December, the troika can withhold disbursement of the next tranche of funds for longer, possibly even forcing the Greek government to part-suspend payment of salaries to government workers by mid-October,” UBS economist Larry Hatheway wrote in a note to clients on Monday, warning that brinkmanship and tough talking could further unnerve markets.

The sovereign crisis is now becoming an economic one, according to Deutsche Bank, which amended its forecasts to predict a mild recession in the eurozone over the next six months.

European finance ministers meet on Monday night as they try once again to find a solution to the ongoing sovereign debt crisis, which still threatens to spread beyond Greece. Policymakers did briefly cheer markets last week by hinting that they would look to find ways to leverage the euro zone’s temporary bailout fund, the European Financial Stability Facility (EFSF), to increase its size.

Reforms of the EFSF, which will allow it to recapitalise the banking sector - a key measure in limiting “contagion” from a Greek sovereign default - is currently being ratified by governments across Europe. Last week the lower house in Germany, the largest contributor to the fund, passed the reform without significant dissent.

With resources currently standing at €440 billion, markets are unsure whether the fund will be able to successfully bail out faltering economies and recapitalise banks in the event of contagion, however.

In July, banks agreed to take a 21 per cent “haircut” on their Greek debt holdings as part of a voluntary arrangement

“Without additional resources, the EFSF remains too small to simultaneously finance bank recapitalisation and engage in sovereign debt market stabilisation,” Hatheway said.

Speaking at the Conservative Party conference before leaving for the finance ministers’ meeting, UK Chancellor George Osborne told delegates that a resolution to the crisis on the continent would be the biggest boost that the UK economy could get this autumn.

“They’ve got to get out and fix their roof, even though it’s already pouring with rain,” he said, after praising his predecessors for keeping Britain out of the single currency.