Greece red-faced after leaked debt warning

The Greek finance ministry was on the defensive on Thursday after a new budget watchdog released an internal report warning that debt was ?out of control? just as officials held critical talks with creditors.

Finance Minister Evangelos Venizelos, who had enough troubles this week explaining Greece?s reform delays and target slippage to auditors from the EU, the IMF and the ECB, attributed the error to inexperience.

?All responsible international organisations know in which way macroeconomic and fiscal reports are compiled, checked and published,? Venizelos said in a statement.

?It is clear that the budget office still lacks this knowledge, experience and responsibility,? the minister said.

The report, excerpts of which were reported by the semi-state Athens News Agency on Wednesday, warned that the dynamic of Greece?s enormous debt is ?out of control?.

It said that slippage on meeting deficit targets, exacerbated by a deep recession, threatened to cancel out the benefits of a new EU bailout.

?A significant debt increase, a high primary deficit and the deep recession have boosted to the extreme the debt dynamic, which is now out of control,? the newly-formed State Budget Execution Monitoring Office, staffed by independent analysts, said in a report.

?These developments seem to offset to a great extent the positive impact? of the latest EU loan package of 159 billion euros ($229 billion) agreed last month, it added.

Venizelos insisted on Thursday that the document ?lacks the validity? of equivalent international reports.

Greece is currently undergoing an EU-IMF-ECB audit which will determine whether it will be given the latest portion out of an earlier 110-billion-euro loan that pulled the country back from the brink of bankruptcy last year.

Held down by cutbacks, the Greek economy is shrinking at an alarming rate, with Venizelos last week admitting it will likely contract by more than 4.5 percent this year, worse than an earlier 3.5 percent forecast.

Greece?s debt, meanwhile, has ballooned to over 350 billion euros.

Greek reports said senior EU, ECB and IMF representatives who arrived on Monday to head the audit, have noted delays in the application of the recovery programme, particularly in sectors that threaten to raise strong union protest.

?The coming weeks until October 15-20 are very critical and serious,? Venizelos told Real FM radio in an interview on Wednesday.

Greece?s public deficit is also running dangerously high, coming in at 14.69 billion euros in the first half of 2011 compared to a target of 16.68 billion for the entire year.

In July it climbed further to 15.5 billion euros, deputy finance minister Filippos Sachinidis told parliament on Wednesday.

He added that part of state revenue included in this year?s calculations will not be collected until early 2012.

To make up the shortfall, on Thursday the authorities raised sales tax for food at restaurants and hotels by ten points to 23 percent.

The restaurant sector has described the measure as ruinous and some operators have threatened to withhold the tax to avoid closing down altogether.

Athens also has to contend with a cacophony in Europe over a controversial cash collateral deal with Finland in return for Helsinki?s portion of a second loan package.

Eurozone leaders approved a new 109-billion-euro bailout for Greece in July to save the country from bankruptcy, with the private sector providing another 50 billion euros.

But Finland later negotiated a cash collateral deal with Greece, an arrangement that was effectively shot down by vehement opposition from Germany, Austria, the Netherlands, Slovenia and Slovakia.

Eurozone officials are hastily trying to work out a compromise. [AFP]