THE magnitude of Greece's fiscal challenge was laid bare yesterday as Athens unveiled new budget projections exceeding the worst-case scenarios envisioned by international lenders when they agreed an €174bn rescue eight months ago.
Instead of Greece's debt peaking at 167pc of economic output next year, as predicted in the March bailout agreement, it will hit 189pc and climb to 192pc in 2014, according to projections presented to the Greek parliament.
Even under an "alternate scenario" prepared by the International Monetary Fund in March, which attempted to project a pessimistic economic and fiscal picture, Greece's debt was only predicted to peak at 171pc of gross domestic product.
Greece needs to push through cuts and tax measures worth €13.5bn as a well as a raft of economic reforms to appease EU and IMF lenders.
In a bleaker than expected forecast yesterday, Athens revealed that its economy will shrink by about 4.5pc compared with a previous forecast of 3.8pc.
With Greece pleading for a €31bn aid payout this month and the country facing a sixth year of recession, euro finance ministers said unfreezing loans for the country required more efforts in Athens to rein in the budget deficit and deregulate the economy.
The scale of the faltering has yet again put Germany and other eurozone creditors in a political quandary, forced to come up with as much as €30bn in new funding to meet Greece's needs for an overhauled bailout though 2016, despite resistance at home to any new aid.
"It is not exactly a surprise, but it's going to stir debate on Greece's future funding," said one Greek official.
Eurozone finance ministers began to lay the groundwork for a deal in a conference call on yesterday, where each country laid out red lines, according to people briefed on the discussions. Germany has ruled out additional aid or taking losses on existing bailout loans to lighten Greece's debt load.
Instead, EU officials said they were looking at three possible solutions to close the gap: further lowering interest rates on bailout loans; buying back Greek bonds at current depressed prices and retiring them; or striking a deal with the European Central Bank not to take profits on the €55bn in Greek bonds it holds. Officials said the eventual solution was likely to be a combination.
Meanwhile, Portugal's parliament approved the biggest tax increases in the country's modern history yesterday, paving the way for a court battle over a budget which the government says is vital for keeping its international bailout afloat.
Prime Minister Pedro Passos Coelho's government has searched for ways to guarantee revenues in order to meet budget goals set under the €78bn ($101 billion) bailout deal with the European Union and International Monetary Fund.
All lawmakers present from the two parties in the centre-right ruling coalition voted for the budget at its first reading while all other parties, including the opposition Socialists, voted against in parliament.
The budget sets Portugal, which this year is suffering its deepest recession since the 1970s, on course for a third year of economic contraction in 2013 as households face higher taxes and record unemployment of over 15pc.