Greece will miss a deficit target set just months ago in a massive bailout package, according to government draft budget figures released on Sunday, showing that drastic steps taken to avert bankruptcy may not be enough.
The dire forecasts came while inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, were in Athens scouring the country's books to decide whether to approve a loan tranche. Without that installment, Greece will likely run out of cash as soon as this month.
The 2012 draft budget approved by the Greek cabinet on Sunday predicts a deficit of 8.5 percent of gross domestic product (GDP) for 2011, well short of the 7.6 percent target.
The 2012 deficit is set to meet a nominal target of 14.6 billion euros, but at 6.8 percent of GDP it falls short of a target of 6.5 percent, because the economy will shrink further.
Three critical months remain to finish 2011, and the final estimate of 8.5 percent of GDP deficit can be achieved if the state mechanism and citizens respond accordingly, the Finance Ministry said in a statement.
European officials are scrambling to avert an abrupt Greek bankruptcy, which would wreck the balance sheets of European banks, jeopardize the future of the single currency and potentially plunge the world into a new global financial crisis.
European Union officials say the troika's assessment of Greece's future prospects could determine whether it needs to demand more debt relief from private creditors, a measure that could effectively amount to default.
In Sunday's documents, GDP is predicted to fall by 5.5 percent this year. Government sources said it was expected to shrink 2 to 2.5 percent next year.
Those numbers are in line with recent forecasts by the IMF, but much worse than predictions used to calculate a 109 billion euro ($146 billion) bailout in July, which anticipated Greece posting 0.6 percent growth next year.
The shortfall in the 2011 deficit target means Greece would need almost 2 billion extra euros just to finance its expenses for this year. It also means that the additional emergency tax hikes and wage cuts announced in the past two months, designed to hit that target, have not been enough to put Greece's finances back on track.
The vicious circle continues for the government, said Yannis Varoufakis, economic professor at Athens University. We have disappointing revenues [and] missed targets, and this will bring new measures and new austerity.
To persuade the troika to release the next tranche of loans, Greece has promised to raise taxes, cut state wages and speed up plans to reduce the number of public sector workers by a fifth by 2015.
The cabinet approved a particularly contentious part of the plan on Sunday, creating a measure to reduce the number of state workers, a legal and political minefield in a country where government jobs are explicitly protected by the constitution.
The measure adopted by the cabinet on Sunday creates a labor reserve, allowing 30,000 state workers to be placed on 60 percent pay and be dismissed after a year.
But the government softened the blow -- and saved less money than troika inspectors initially sought -- because about two-thirds of the workers would be near pension age and due to retire soon anyway. The rest of the reductions would be from state firms that would merge or shut down.
Euro zone finance ministers are expected to discuss Greece at a meeting in Brussels on Monday, but they will be waiting for the troika inspectors' report before making any new decisions.
The inspectors are widely expected to give a green light to the release of the next 8 billion euro tranche of aid to avoid plunging the euro zone deeper into turmoil. But all eyes will be on their forecasts for 2012-2014.
If the inspectors conclude Greece's recession will continue to be worse than predicted, EU officials have suggested that banks that agreed to write off 21 percent of the value of their Greek debt holdings in July may be forced to take deeper losses.
The austerity measures are deeply unpopular, and public sector unions hope a campaign of strikes and demonstrations can wreck the Socialist government's resolve to enact them. Striking civil servants have disrupted the talks with the troika over the past days by blockading ministries.
The government has a majority of just four seats in parliament and could be forced into elections if a handful of lawmakers balk. But disgruntled legislators have toed the party line over the past weeks and analysts expect them to continue to do so and pass the austerity budget.
We have a single and steady goal -- to meet our commitments so that we guarantee our credibility, Greek Prime Minister George Papandreou told his cabinet, according to a statement from his office.
The inspection visit, which is expected to last well into this week, also focuses on budget plans for 2012-2014, and commitments to raise 50 billion euros from privatizations by 2015 and open up the country's heavily-regulated economy.
(Additional reporting by Lefteris Papadimas and Renee Maltezou; Writing by Peter Graff and Ingrid Melander)