European stock markets opened the week's trading in negative territory, following the news that Greece will likely fail to meet deficit-reduction targets set out for both 2011 and 2012.
Frankfurt's DAX index was down by more than three percent in early trading, while the FTSE 100 in London and the CAC 40 in Paris each dropped by more than two percent. This followed similar losses on Asian markets.
Particularly hard hit were shares of the Dexia bank, which dropped by almost nine percent. This followed a report in the French daily Les Echos that the Franco-German bank has one of the largest exposures to Greece among non-Greek financial institutions. The French and Belgian finance ministers were to meet later on Monday to discuss ways of shoring up Dexia.
The tumble on the markets came a day after the finance ministry in Athens announced that it expected Greece's budget deficit to reach 8.5 percent of gross domestic product (GDP) this year, below an initial target of 7.6 percent.
According to a statement issued by the finance ministry, Greece will manage to bring the budget deficit down to 6.8 percent of GDP next year, but it will still miss the bailout target of 6.5 percent of GDP.
"Three critical months remain for the completion of the financial year 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 statement said.
Public sector cuts
The Greek government also unveiled plans on Sunday to shrink its civil service to appease creditors, who have been reluctant to free up the country's next tranche of bailout funds.
The 17 countries that share the troubled euro single currency are set to meet in Luxembourg on Monday to discuss the possible release of the latest eight-billion-euro ($10.7-billion) tranche of a loan to Greece, which the International Monetary Fund (IMF) has blocked for the past month.
Without the bailout installment, Athens says it will default on its bills within weeks, potentially doing unprecedented damage to the euro currency and sparking a new global financial crisis.
The Greek cabinet met to discuss its plan for public sector layoffs - the most unpopular element of the austerity measures demanded by the so-called troika of international lenders, comprising the European Union, the European Central Bank and the IMF.
Under the so-called "labor reserve" plan, nearly 30,000 workers would be eased out of their jobs by being placed on reserve for a year at 60 percent of their current wages, after which they would be dismissed.
Greek officials have not made it clear whether the plan would only be used to force early retirement among older workers, or if it would also make younger civil servants redundant. The public sector, whose employees are protected from dismissal by the Greek constitution, accounts for a fifth of Greece's labor force.
Labor unions have vowed to step up pressure against the Socialist government, planning strikes and protests in coming weeks. The government, which has a majority of just four seats in parliament, could be forced into elections if just a handful of legislators balk at the austerity plans.
Better off euro-free?
On Sunday, a top official from the Bavarian-based sister party of German Chancellor Angela Merkel's Christian Democrats suggested that Greece should consider exiting the eurozone.
"I think it is a solution, if you want to bring Greece back to stable competitiveness, that they do so outside the eurozone," Alexander Dobrindt, general secretary of the Christian Social Union (CSU), told German public radio.
He added that the eurozone's bailout fund, the European Financial Stability Facility (EFSF) "should have the right to organize the exit" of Greece from the currency bloc, should the debt-ridden country fail to impress an international team of auditors with its reform efforts.
Meanwhile, Austrian Finance Minister Maria Fekter told Germany's Welt am Sonntag newspaper she thought the eurozone was likely to grant Greece a new slice of aid.
"The likelihood that the next eight-billion-euro slice of aid will be paid out to Greece is, in my view, clearly higher than the likelihood it will not be paid," she said.
"It should not be the case that the payment of individual tranches of aid become a battle every three months because Greece threatens to fall short of the conditions," she added.
The troika has been in Athens since Thursday, after they cut off a meeting early a month ago because the government had failed to implement pledged reforms.
Athens is struggling under at least 350 billion euros of debts. The government has promised the troika to introduce new taxes, cut state wages by an average of 20 percent and reduce the number of public-sector workers by 2015.
Author: David Levitz, Chuck Penfold (AFP, Reuters, dpa)
Editor: Michael Lawton