Brussels discovers new €15bn black hole in Greece's finances

Larry Elliott, Katie Allen and Giles Tremlett in Madrid

guardian.co.uk, Thursday 2 February 2012 20.05 GMT

Revelation raises pressure on stricken economy. EU states to be asked for further financial help.

Greece's presidential guard on duty in heavy snow in Athens. The discovery of another black hole in the country's finances was one of several items of gloomy economic news from the eurozone. Photograph: Yiorgos Karahalis/Reuters

Pressure on Greece's recession-stricken economy has intensified after international debt inspectors admitted an additional €15bn (£12.5bn) would be needed to fill a newly discovered black hole in the country's finances.

On a day when Ireland's government reduced its growth forecast and Madrid told Spanish banks to raise an extra €50bn to cover toxic assets, Brussels officials said European countries and state-owned banks would be asked for contributions to help Athens out of its fiscal troubles.

The fresh evidence of Greece's desperate financial plight came as it continued to discuss the terms of a deal with private sector creditors aimed at writing down debts by €100bn, and was an admission that the "haircut" being taken by banks, hedge funds and insurance companies would not be enough on its own to remove the risk of a default.

International Monetary Fund officials said that time was running out to finalise the negotiations in time to trigger payment of the next tranche of its €130bn bailout from the European commission, the European Union and the IMF.

The so-called troika has recognised in the past few days that Greece faces an impossible task in reducing debt when the economy is in such deep recession, and now accepts that the country's sovereign creditors will have to supplement the debt relief being provided by the private sector. Spending cuts, tax increases and the general uncertainty of the crisis have already pushed Greece into a slump, which in turn has eliminated many of the gains from the austerity measures.

Although China's premier, Wen Jiabao, raised hopes after talks with the German chancellor Angela Merkel that the world's fastest-growing emerging economy would consider boosting its contribution to Europe's bailout fund, there were fresh signs of strain in those countries most affected by the sovereign debt crisis.

Spain's finance minister, Luis de Guindos, ushered in a fresh round of consolidation when he told banks they had to make provision for bad loans and write downs in the country's troubled property sector.

With Spain falling into the second part of a double-dip recession and unemployment at 23%, de Guindos's new rules exposed the still dire state of the property market. Officials claimed it was the most ambitious attempt to cleanse banks' balance sheets in Europe. "Spain's banking system will emerge from this process stronger, with fewer but more solid banks," the economy ministry said.

Banks have absorbed large amounts of toxic assets as building developers default on loans in a country with a glut of 500,000 unsold new homes. They have already made provision for a third of the €176bn of "troubled" assets on their books, according to Spain's central bank.

Under the new rules total provisions against building lots, many of which are illiquid, will reach 80%. Those against ongoing building developments will hit 65%, while provisions against completed houses will reach 35%.

The measures show how developers, rather than mortgage-holders, became the biggest danger to Spain's banking system after politically controlled savings banks lent freely to them during a dizzying building boom that halted in 2008.

Many of those banks have already disappeared after a round of mergers that began in 2009. The fresh mergers will reduce the total even further, with all eyes now on Bankia, a troubled group formed from the merger of seven savings banks.

The country's bank restructuring fund will receive a €15bn top-up, though this will not add to the deficit. Banking reform was one of the major planks of a programme promised by conservative People's party prime minister Mariano Rajoy, who won November elections.

Meanwhile, Ireland's central bank slashed its growth forecast for 2012 from 1.8% to just 0.5%, blaming a slowdown in consumer spending and a tougher outlook for exports due to Europe's debt crisis.

Taoiseach Enda Kenny refused to accept the government's more optimistic budget forecasts were out of line with those from the central bank and claimed the real priority was creating jobs. "The government's growth figures are median figures and we are prepared to stand by those," said Kenny.

Market attention on Friday will focus on the US where the latest official unemployment data is expected to show further slight improvement in the job market.

While the unemployment rate for January is likely to stay at 8.5%, the world's largest economy is expected to have added 150,000 jobs. That is slightly below growth of 200,000 in December, however, with economists expecting seasonal layoffs of couriers after Christmas to knock job creation.

Data on Thursday reinforced a growing view the US labour market is slowly improving, with new claims for unemployment benefits falling more than expected last week.

US Federal Reserve chairman Ben Bernanke sought to reassure markets that there had been signs of modest improvement in the labour market, but conceded the pace of recovery was slow. Bernanke told Congress there were signs uncertainty dogging the US economy was letting up, but that the eurozone crisis still threatened the country's recovery.

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