Monday 06 March 2017 1:08 pm

Greece growth downgraded further as bailout hangs in the balance

The Greek economy shrank far more than was previously thought at the end of 2016, putting the growth underpinning its bailout deal this year under further threat.

Output in the embattled country declined by 1.2 per cent in the final three months of the year, according to the Hellenic Statistical Authority, a big downwards revision from the first estimate of a 0.4 per cent contraction.

Klaus Regling, who heads the European Stability Mechanism (ESM), said an agreement over releasing the next tranche of Greece’s €86bn (£74bn) bailout could be reached at the next meeting of Eurozone finance ministers. The ESM administers the bailout on behalf of Greece’s creditors.

Regling said: “I’m not excluding the possibility that everything is ready by the next Eurogroup on 20 March, but we are not at all certain. We still have a lot of work to do. We need to see how much progress will be made in the next two weeks.”

Greece needs further cash to repay €7bn (£6.1bn) in bond payments in July. Bailout monitors returned to Athens last week to continue assessing Greece’s efforts, an important step in unlocking the next payment.

Regling also said the Greek government has “very small” steps left on running a government surplus of 3.5 per cent of GDP. However, that target has been the subject of intense debate amongst creditors, after an internal report by the International Monetary Fund (IMF) described debt levels as “explosive”.

Divisions between IMF directors spilt out into the open, with a lower surplus target of 1.5 per cent of GDP favoured by some.

The Greek government further complicated matters last week by asking the World Bank, usually reserved for developing nations, for financial assistance, Politico reported.

The yield on bonds due in July rose more than doubled at the end of January to reach 15 per cent, according to Tradeweb, on fears the bailout would fall through, before recovering. However, over the past week yields have risen again to above 12 per cent.

Creditors are torn between efforts to boost growth, which would make it much easier for the Greek government to make debt repayments, and a desire to avoid delaying or cutting the amount of money they recoup.

Greece’s economy has suffered massively since the crisis erupted, with GDP in 2015 55 per cent lower than its peak in 2008. The left-wing Syriza government has seen its popularity plummet in recent months, as it capitulated to the demands of creditors.