Sunday 14 March 2010

Greek Debt Forecast March 2010

The Greek government austerity package approved on March 5th, 2010 is forecast to add EUR 2.4 bln in government revenue and cut EUR 2.4 bln in government expenditure from 2010.

I have used these numbers to update the original Stability and Growth Programme forecast (published in January 2010), and adjusted for the 2009 GDP revision of -2.6% announced by the National Statistics Services, as well as the Bank of Greece’s 2010 GDP forecast of -2.0% announced this week.
Under this forecast:
· The deficit falls to -0.31% of GDP in 2013, of EUR 0.76 bln
· Total debt rises to EUR 327.01 bln in 2013
· Government income and expenditure equalise, at roughly 52% of GDP, in 2013

The implementation risks in this forecast include the following:

a. Total debt was over EUR 300 bln at end 2009

b. In its May 2009 press release, the Ministry of Finance claims that the expenditure cuts are permanent. This is highly unlikely, unless we consider that these are one-off cuts, which will be followed by annual cost-of-living or inflationary increases in subsequent years.

c. The next planned national elections will have to be held in 2012 or 2013 at the latest. Will government fiscal discipline continue in an election year?

d. It is impossible to predict government income as a function of GDP in a recession of the magnitude currently under forecast. Government income from taxes will likely be lower than planned.

e. The government debt forecast does not provide for a number of liabilities which are known, but for various reasons have not been consolidated or provided for in the central government debt. These include:

  • Higher interest rates for sovereign debt;
  • The EUR 7 bln debt of the Hellenic Railways Organisation (OSE);
  • The state aid repayment and other debt provisions from Olympic Airways and its former employees;
  • The continuing high and essentially unknown liabilities originating from state social security funds and hospitals;
  • The opaque state of actual liabilities stemming from public-private partnership deals as well as interest rate swaps.
f. The likelihood of a further drastic economic collapse, due to payment delays and liquidity problems among small and micro-enterprises; creative accounting by large companies; and bank recapitalisation issues, is growing.

g. The fact that in general, the Greek corporate sector model must be rationalised through the closure of the high number of small and micro-enterprises, and larger firms.

There are also a number of potential upside benefits which may not be reflected in the forecast:

a. The government could, in theory, accelerate the funding absorption of European Union funds. In practise, however, the past record of absorption has been low, and requires government co-funding at a time when general public investment expenditure is being cut. Fund absorption has in general not delivered longer-term economic benefits proportional to the investments made, for a variety of reasons.

b. Greece could privatise a number of strategic assets, and green-light a number of investments. The privatisation potential is probably limited to EUR 2 bln per year, and will meet with major public sector protests.

c. The scale of the crisis could prompt a fundamental restructuring of the Greek public sector, which is what Prime Minister Papandreou has promised. Obviously, the main risk is whether this can actually be implemented.

I do not believe the relatively optimistic scenario reflected by this updated SGP will be possible. Indeed, I believe that total “official” public debt will top EUR 330 bln in 2010 and EUR 350 bln in 2011 unless additional measures are taken, primarily to combat tax evasion, streamline the competitive environment and attract external investment.

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