A man walks in front of the headquarters of National Bank of Greece in Athens
A man walks in front of the headquarters of the National Bank of Greece in Athens July 23, 2010. REUTERS

Greece's budget problems are far from over, as its deficit is likely to have narrowed much less sharply than the Government had predicted, Capital Economics said in a note.

Greece will now come under heavy pressure to implement an even more draconian fiscal squeeze, Ben May, a European economist with Capital Economics, said.

Greece's budget deficit for the January to October period was 17.4 billion euros, narrowly missing its target. The Greek government had expected a drop of 32 percent instead of 30 percent.

While worries about the euro-zone's periphery have recently focused on Ireland and Portugal, Greece remains in a very precarious position, May said.

This is emphasized by comments from a Greek official who suggested that the 2010 general budget deficit is likely to equal around 9.3 percent of GDP.

The government had revised its 2010 general budget deficit forecast for 2010 to 7.9 percent last month, from 8.1 percent.

The lower-than-expected central government borrowing, coupled with the recent surge in government bonds yields, means that Greece is still a long way from being able to return to the markets to meet its entire financing needs, May said.

Currently, the government's financing needs are being met by the Eurozone/International Monetary Fund bailout package, he added.

Greece, which had the second highest budget deficit at the end of 2009 after Ireland, needed a bailout package from the EU and the IMF. The country was accused of trying to play down its economic problems in the face of the global economic crisis.

The EU and the IMF awarded the country a bailout package in April this year, on the condition that Greece implements a harsh austerity system. The pay cuts and other measures which were part of the austerity plan led to wide-spread protests across the region, resulting in at least three deaths in Athens.

The EU, EBC and IMF will visit Greece next week to access whether its budget deficit and structural reform targets are being met, before issuing a third tranche of loans next week.

At the very least, we think that the troika may demand new savings worth 1 percent of GDP next year. But the government could be pushed into announcing larger additional measures, May said.

Though the upward revision to the deficit figures is a worry, it might not result in Greece failing to receive further loans, he added.

However, the country will be eventually forced to restructure its debts, May said.