Friday 10 September 2010

Some Progress; Major Problems Ahead

The latest monthly report on Greece’s budget implementation, which covers January – August 2010, shows that despite a small acceleration of revenue collection and an important reduction of expenditure, the government has a deficit of just over EUR 14 bln year to date.

This is a 33% reduction over 2009, and excellent progress, but it reveals two major weaknesses:

a.       Income has only risen by 2.8%, despite major increases in excise taxes on cigarettes, alcoholic drinks, fuel and certain VAT categories and more intensive tax auditing. This either indicates increased tax evasion and/or decreased expenditure on a massive scale.

b.      Total government debt continues to rise faster than the public deficit, due to transfers of debt from semi-governmental organisations such as OSE.

There are also a number of questions to ask regarding this budget statement:

a.       There are indications in the market that the government has not fully paid pack value-added tax (VAT) in arrears. Does the “tax returns” line represent full and fair value of the taxes which should be returned?

b.      There are press reports of further massive unpaid debts to the construction sector for public investment works, as well as a range of other unpaid bills. Have these been fully booked to the budget?

To the end of 2010, the Memorandum foresees a total deficit of EUR 18.69 bln. This looks like it will be difficult to reach: I would expect it to be closer to EUR 20 bln. This is higher than my original estimate of EUR 15 bln, but probably still lower than what may actually materialise. I'm using EUR 18 bln for forecasting purposes.

As of 31.03.2010, Greece’s public debt was EUR 310.4 bln, according to the Public Debt Management Agency. I forecast a real GDP fall of 5% in 2010, for a GDP of EUR 225 bln. Assuming additions to Central Government debt of EUR 31.8 bln, then debt-to-GDP will have reached 152% by year end.

This forecast may be wrong, but I’ve done everything possible to reduce total debt additions.  I’ve eliminated healthcare and other public organisations debt assumption for 2010, and included a “conservative” central government deficit of EUR 18 bln.

Many people maintain that the GDP decline may actually only be -4%. Unfortunately, all signs point to a worsening micro and macroeconomic situation. Industrial production has fallen by over 9% in QI-II 2010; retail sales have fallen by over 20%; tourism revenues are down by 10%. Over EUR 17 bln in cash deposits have apparently left Greece since the start of the year. Unemployment has reportedly risen to near 12%.

Even taking an annualised 5% inflation into account, it is hard to see how GDP will not fall by at least 5% in real terms, particularly given the 12% fall in primary government expenditure. I believe 5% in real terms may in itself be an optimistic forecast.

In this climate, the Prime Minister is set to deliver his “speech to the Productive Classes” (!) at the Thessaloniki Exhibition tomorrow evening. I sincerely hope he will announce plans to accelerate the implementation of what has been promised, but somehow I’m not convinced he and many of his ministers understand the gravity of the situation. As local elections approach in November, it seems to me that PASOK has moved from governance to electioneering, and we will lose yet more valuable time in implementing the needed reforms.

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