Greece is likely to miss a deficit target set as part of July's bailout package, casting doubt over the country's ability to avert bankruptcy.
Inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, are in Athens scouring the country's books to decide whether to approve a loan tranche. Without that installment, Greece would run out of cash as soon as this month.
The 2012 draft budget approved by cabinet yesterday predicts a deficit of 8.5 per cent of gross domestic product (GDP) for 2011, well short of the 7.6 per cent target.
Asian stock markets tumbled today as sentiment took a hit from a weakening economic picture in Europe and Greece's admission it won't meet its deficit reduction target.
The 2012 deficit is set to meet a nominal target of €14.6 billion, but at 6.8 per cent of GDP it falls short of a target of 6.5 per cent, because the economy will shrink further.
"Three critical months remain to finish 2011, and the final estimate of 8.5 per cent of GDP deficit can be achieved if the state mechanism and citizens respond accordingly," the finance ministry said in a statement.
Deputy finance minister Pantelis Oikonomou expressed the opinion that Greece managed to convince its lenders that fiscal slippages were mainly due to a deeper-than-expected recession.
"To the extent that they were convinced that... the recession is indeed deeper, I think that we have figured things out," deputy finance minister Pantelis Oikonomou told television station Mega.
Asked whether the negotiations with the "troika" of EU/IMF inspectors have come to a successful conclusion, Mr Oikonomou said: "I believe we have essentially concluded... we have covered all the main topics".
However, sources close to the talk later denied suggestions that they had concluded.
European officials are scrambling to avert an abrupt Greek bankruptcy, which would wreck the balance sheets of European banks, jeopardise the future of the single currency and potentially plunge the world into a new global financial crisis.
EU 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.
Yesterday's documents predict GDP to fall by 5.5 per cent this year. Government sources said it was expected to shrink 2-2.5 per cent next year.
Those numbers are in line with recent forecasts by the IMF, but much worse than predictions used to calculate a €109 billion bailout in July, which anticipated Greece posting 0.6 per cent growth next year.
The shortfall in the 2011 deficit target means Greece would need almost €2 billion extra just to finance its expenses for this year. It also means additional emergency tax hikes and wage cuts announced in the past two months to hit the target have not been enough to put Greece's finances back on track.
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 yesterday, 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 creates a "labour reserve" allowing 30,000 state workers to be placed on 60 per cent 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 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 today, but will be waiting for the troika inspectors' report before taking any new decisions.
The inspectors are widely expected to give a green light to the release of the next €8 billion 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 banks that agreed to write off 21 per cent of the value of their Greek debt holdings in July may be forced to take deeper losses.
Reuters