Greece has been in the spotlight recently following its weak and derailed fiscal position. The consolidations of public finances have become the number one priority of the government and measures to tackle the ballooning budget deficit and rising government debt have been scrutinised by the investment community. The Investment Bank of Greece, the leading brokerage arm of Marfin Popular Bank Group, is cautiously optimistic on Greece’s macro outlook for 2010.

The main concerns for the Greek economy relate mainly to the consolidation of public finances and the fiscal position of the country. More specifically, the increasing budget deficit and the constantly rising government debt have been in the spotlight of attention, as well as the necessary structural reforms required for the enhancement of the economy’s competitiveness. Moreover, the sharp slowdown in credit expansion, the fall in consumer confidence and relatively high inflation, could lead to a further slowdown of domestic demand in the coming quarters. Looking forward, a successful implementation of the government’s plan to tackle fiscal imbalances and de-escalate government debt, as well as proceed to the necessary restructuring of the public finances, would restore the country’s credibility towards the investment community and the market’s players and ease increasing concerns on the possibility of the country defaulting. Nonetheless, the time lines are very strict and the pressures by the markets extremely high for immediate results and specific initiatives, implying that the coming quarters will be an important milestone for the effectiveness of the proposed measures, as outlined in the Stability & Development Programme. One should take into consideration that in 2010 Greece would be the first Eurozone country to enter the second stage of the Excessive Deficit Procedure (par9 article 104 of the EC treaty).      

Market players seem to welcome government’s targets to reduce the deficit but appear concerned with respect to the effectiveness of the measures. The main point of concern relates to the fact that a large portion of the deficit contraction will be based on rising revenues. The bears argue that measures which are based on increasing revenues might prove ineffective, as economic activity is projected to continue its contraction this year. Moreover, market players seem to ask for more specific and bolder measures by the Greek government in its efforts to sustainably reform public finances, and basically they put pressure on cost cutting, as they consider this action would be more effective and a permanent measure in reducing government spending.

Indeed, revenue enhancement in a contracting economy seems very difficult to achieve. However, having a closer look at the state’s finances could prove the opposite. In more detail, the FinMin has revealed that 94 percent of Greek citizens reported that their personal income level was below the Ä30k mark in FY08 and that Greece’s total taxation revenues (as a percentage of GDP) stood at the low end of its peers, coming in at just 19.8 percent vs. 26.2 percent of EU27 average. This was the case despite the fact that Greece’s individual and corporate tax rates are at the same level of the EU average. In other words, given the high level of tax evasion, revenue enhancement could be achieved, even in a declining economy, if measures to tackle the problem of tax evasion are successful.

As a result, we believe that the measures, announced so far are in the right direction as processes and attempts that are based solely on “cost containment” (wage reductions, increase in taxation, etc), could hurt the economy’s growth path and consumption, ultimately leading to lower revenues for the state. Hence, measures that aim to reduce spending without altering the growth path of the economy should be viewed as positive, in our view.
       
In terms of political and economic conditions, we believe that the relatively newly elected government (the current government was elected in October 09), has a fresh mandate and an ample parliamentary majority, that allow itself to take advantage of the emergency conditions and tackle the structural problems of the economy. One should also bear in mind, that in implementing long-term reforms of structural character, the government has to seek support from social partners, guarantee social cohesion and try to prevent unrest from discomforted income groups, such as wage-paid employees and pensioners. To that extent, the new government has a comparative advantage, as it is closer to the labour unions.   

From another perspective and despite the gloomy outlook on the Greek economy, we highlight the fact that European economic authorities, which constitute the responsible counterparts of the Greek government (and not the rating agencies), have repeatedly expressed their confidence that the new Greek government will proceed to the necessary reforms in order to improve its public finances. The European Commission and the European Council have already indicated that Greece will face a higher surveillance and more detailed controls than other countries under the second stage of the Excessive Deficit Procedure, where it would be very difficult for the government to diverge from budget’s targets. In addition, the Finance ministry has not excluded the possibility of submitting a supplementary budget within 2010, in case this is needed.

GDP
Having experienced a decade of strong growth of four percent on average, the Greek economy has contracted in 2009 for the first time in 16 years, marking a negative growth rate in every quarter, with estimates for FY09 ranging from -1.1 percent to -1.7 percent. According to the latest data from the National Statistical Service (NSS), Greek GDP in Q309 shaped at Ä45.7bn, posting an annual rate of decline of 1.7 percent (vs.-1.2 percent year on year in Q209 and -0.5 percent in Q109). Regarding the upcoming period, Q409 economic contraction is seen at around one percent, according to our estimates, while for FY09 and FY10 many international organisations as well as the Greek government estimate that the economy will suffer negative growth rates, before recovering gradually in 2011. More specifically, according to the Finance Ministry’s December forecasts, the decline in national income could reach the rate for 1.5 percent for 2009, decelerating to 0.3 percent this year and rebounding to positive grounds in 2011 (+1.5 percent). The recession in the Greek economy has not been and is not projected to be as deep as in other European countries, but the period of economic contraction − albeit at low levels − is expected to last longer compared to other European peers.

Budget deficit
According to the December 09 forecasts of the Finance Ministry, budget deficit amounted to 12.7 percent of GDP in FY09 or over Ä30bn (vs. 7.7 percent of GDP in 2008), with the government aiming to reduce the relevant ratio by 4pp to 8.7 percent of GDP in 2010, and by c. 3pp for each year from 2011 onwards (below six percent of GDP in 2011, and below three percent of GDP in 2012), following the suggestions of the BoG to gradually lower the relevant index to below the three percent EU benchmark in a period of three to four years. The increase in budget deficit is attributable to the lag of revenue collections compared to initial targets, as well as to higher government spending. More specifically, data show that revenues declined by c.4.3 percent year on year in FY09 (while initial targets forecasted an increase of 18.5 percent) and spending (primary expenditure + public investment expenditure) increased by c.13 percent year on year (against a target seven percent increase).
 
Government debt
Addressing the issue of the rising government debt is another challenge for the Greek economic authorities. According to the December 09 FIMIN forecasts, the overall figure amounted to c.Ä300bn, 113.4 percent of GDP in 2009 (vs. 99.2 percent of GDP in 2008, +14.2 percent year on year), with the Greek government estimating that the ratio would reach 120.8 percent of GDP in the current year, thus maintaining its number one ranking among its European peers in terms of indebtedness. Accordingly, FY09e interest spending is seen amounting to c.Ä12.3bn (i.e. 5.1 percent of GDP) and is forecasted to reach Ä13bn this year (i.e. 5.3 percent of GDP), while compound interest should lie to Ä20bn levels.

In terms of funding needs, the Finance Ministry has said that borrowing requirements for 2010 will reach Ä53-54bn (vs. c.Ä66bn issued in FY09, exceeding initial targets by c.Ä20bn). In the long-run, the government plans to stabilise government debt to c.124 percent of GDP in 2011 and 2012, and start reducing it by 2013 to 121 percent of GDP. On the positive side, we have to underline that Greece has one of the highest maturities in its debt (among its peers), meaning that it will have no problems funding itself in 2010, in our view.   

Michael Andreadis is Deputy General Manager at Investment Bank of Greece