Brian Lenihan, Irish Minister for Finance, chatting with Christine Lagarde, French Minister for Economic Affairs, before the Eurogroup meeting in Brussels, Monday, Feb 15, 2010.

Eurozone finance ministers on Monday told Greece to introduce tougher spending cuts and new taxes to curb its budget deficit.

The Eurogroup of finance ministers from the 16 countries of the currency union said Greece will need to take the extra measures if current cutbacks don't bring its deficit down  from 12.7% of GDP (gross domestic product) to 8.7% this year. Greece will have to report back on progress on March 16th.

Greece has been accused of falsifying budgetary data in the past and on Monday, the European Union requested Athens to provided information on currency swaps, arranged by US investment bank Goldman Sachs and used to hide billions of euro worth of borrowings. Eurostat, the EU statistics office, requested the information. George Papaconstantinou, Greece’s finance minister, told a meeting of the European Policy Centre think-tank on Monday: “The kind of derivatives contracts that are being reported by some newspapers were, at the time, legal and Greece was not the only country to use them. They have since been made illegal, and Greece has not used them since.”

He added: “The current government has neither mandated nor considered any instrument which is not compliant with Eurostat rules.”

The New York Times reported on Sunday that in 2001, just after Greece was admitted to Europe’s monetary union, Goldman Sachs helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

The Times said even as the crisis was nearing the flashpoint in late 2009, banks were searching for ways to help Greece forestall the day of reckoning. In early November - - three months before Athens became the epicenter of global financial anxiety - - a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

Wolfgang Schäuble, German Federal Minister for Finance, Jean-Claude Juncker, Luxembourg Prime Minister, President of the Eurogroup and Jean-Claude Trichet, President of the European Central Bank, chatting prior to the Eurogroup meeting in Brussels, Monday Feb 15, 2010. Schäuble was injured in an assassination attempt in 1990 and has had to use a wheelchair since.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

Greek Prime Minister George Papandreou says that Greek workers and companies evade tax worth €31bn - - more than 10% of GDP.

Greece’s revenue from income tax was 4.7% of GDP in 2007, compared with an EU average of 8%, EU statistics show. Tax revenue dropped by 2.5 percentage points of GDP between 2000 and 2007 to a Eurozone low of 32% even as economic growth averaged 4.1% year.

The Economist reports in its current issue that the Greek government has announced a sweeping overhaul of the tax system, including a drive to collect more revenue from the rich. The upper tax rate of 40% will start at €60,000 ($82,000), down from €75,000, and there will be tough penalties for evaders; shops may be closed and assets seized. Big property holdings, including some church assets, will incur a progressive levy. However, implementing tax reforms will be an uphill struggle as long as corruption abounds among collectors.

The Economist says the first challenge is to induce citizens to show a modicum of honesty in declaring what they earn. Over 95% of individual tax returns are below €30,000, and only a few thousand citizens admit to receiving more than €100,000. "To see how little this corresponds to middle-class Greek reality, you need only visit one of the flourishing and over-subscribed private schools in greater Athens. There, in return for handsome fees, pupils are groomed for elite colleges in Europe and America," the magazine says.

German taxpayers recoil at being asked to bailout tax cheats.

Eurozone countries  have pledged to help Greece if it can't repay its debts but want Greece to make big spending cuts first.

"It's clear that we are all in this together. We won't abandon Greece," said French Finance Minister Christine Lagarde on Monday.

"Greece has to actually deliver and is beginning to deliver. Greece has to demonstrate on a day to day basis .. that it is committed to do what it takes,"she told reporters.

Luxembourg Prime Minister and Eurogroup head, said Greece has agreed to take further action if it looks like it can't hit the target.

"On March 16th we will check to see whether Greece is achieving the targets it has set for itself,"he told a post-meeting press conference.

Juncker said Greece's debt crisis was "first and foremost a Greek problem and an internal Greek problem" and that he believed its program to reduce debt was "feasible."

Juncker said if Greece's budget plans and extra action does not cut the budget deficit, he said the Eurozone would step in and "will take determined and coordinated measures to safeguard the stability of the Eurozone as a whole.".

He refused to be more specific.

"We do not feel it would be wise to have a public discussion of such instruments, but if those instruments are called for, then you can take it that we will have those instruments,"he told the reporters.

Greek Finance Minister George Papaconstantinou called Monday on Eurozone nations to say how a bailout would work, saying this would "stop markets from attacking Greece."

The problem with the currency union is that members retain control over fiscal policy and the countries in trouble now, including Ireland, are paying the price for very bad governments.

Germany in particular, paid huge amounts in aid to these countries and now they are back for more.

German banks are major lenders in Greece, for example, collectively carrying about $43bn in Greek debt on their books, including loans to private individuals and companies, according to Bank for International Settlements data for the third quarter of 2009. Among EU countries, only France's banks, with $75bn, carry a larger share of Greece's $303bn in debt to foreign banks.

In addition, some of Germany's public-sector banks, known as Landesbanken, have issued insurance-like contracts on Greek debt, known as credit-default swaps. The total exposure of the the country's eight Landesbanken is unclear.

Just under 50% of all Greek debt is set to mature between now and the end of 2014 and its financing needs amount to some €55bn this year, of which about half falls due between now and the end of May, including €17bn in amortisations of long-term debt.

Press conference video

SEE Finfacts article, Feb 2008:Ireland's 40-year bonanza of foreign aid from the European Union will amount to €41 billion by the time we become a net contributor in 2013