Greece will overshoot its 2011 budget deficit target by at least one percentage point and its privatisation plan, the second key requirement of an EU/IMF bailout plan, is seriously in doubt, a source close to Athens' international lenders said on Thursday.
IMF, EU and ECB inspectors started combing through Greece's books and laws on Monday to decide whether it has made enough progress to receive a new tranche of the bailout that has staved off Greek bankruptcy in a crisis that has shaken markets worldwide
The official close to the inspectors said it was much too early to say if the 8 billion euro ($11 billion) tranche of aid was at risk in any way as Greece struggled with a deeper-than-expected recession.
Analysts believe Greece will get the aid tranche but it may come with a stark warning over the need to step up reforms.
"The deficit is certainly at least one percentage point higher than the target," the source close to the inspectors said. "We are still counting ... 8.6 percent (of gross domestic product) is the lower range."
Finance Minister Evangelos Venizelos has said that Greece may come close to meeting its targets if it implements all the austerity measures, including new tax hikes and spending cuts, with Athens blaming the shortfall on a recession seen at more than 4.5 percent, and possibly over 5 percent, versus a 3.9 percent projection.
But the troika of EU, IMF and ECB inspectors say delays and shortcomings in implementing the bailout plan are also at fault.
"The gap has three sources: 1) the economy is doing worse than expected; 2) some of the measures of the mid-term plan are not implemented as they should be, either they lag or they are not implemented at all; 3) previous measures which were in the baseline plan yield less than expected, in particular tax measures," the official told Reuters on condition of anonymity.
The inspectors were set to continue discussions with Greek officials later on Thursday both on the deficit itself and on causes of the overshoot.
Asked about the next tranche of EU/IMF aid, which is ultimately decided on by euro zone member states and the International Monetary Fund's board, the official said: "A lot depends on the (deficit) number, on what it is attributed to and on whether they can catch up."
Athens must also raise 1.7 billion euros from privatisations by the end of September and 5 billion euros by the end of the year to meet the conditions set by the European Union and the IMF.
It has already used a 3-year old put option to sell a 10 percent stake in Hellenic Telecom to Deutsche Telekom for about 400 million euros, but that still leaves it short of 1.3 billion euros that must be raised by Sep. 30.
"The government thinks it can achieve the targets but we have serious doubts whether they can achieve that," the official said as the troika visit, set to be concluded next week, was still ongoing.
Underlining the relentless decline of the Greek economy, the Markit Manufacturing Purchasing Managers' Index (PMI)showed on Thursday that manufacturing sector activity shrank for the 24th month running in August, with weak domestic demand outweighing a sharp rise in export orders.
The PMI survey showed manufacturers continued to lay off staff steadily in August. The country's official jobless rate jumped to a record 16.6 percent in May, fueling widespread popular discontent over austerity policies.
The Finance Ministry rejected on Thursday the findings of an independent parliamentary committee of experts, which said on Wednesday that the debt dynamics were out of control and that policies meant to get Greece out of its worst crisis in decades were failing to restore finances.