Greek budget goal too ambitious as austerity hits

By Harry Papachristou – Analysis

ATHENS (BestGrowthStock) – Greece will likely miss its budget deficit target for this year as recession wreaks havoc on construction firms and small businesses, leading to lower tax receipts and higher social spending.

Research firm Capital Economics expects the deficit to shrink to about 9 percent of GDP from 13.6 percent in 2009, short of an 8.1 percent target set out in Greece’s bailout deal with the International Monetary Fund and the European Union.

“While Greece will make significant inroads into its deficit, there remains a strong chance that it will miss its 2010 deficit target,” said Capital Economics analyst Ben May.

Greece this month received the biggest bailout in financial history, with the IMF and the EU pledging 110 billion euros ($134.8 billion) in 2010-2013 to save the country from default.

In return, the debt-laden nation promised to ram through deficit cut measures of a total of 45 billion euros over the same period to narrow its budget gap by an unprecedented 11 percentage points of GDP, to below an EU ceiling of 3 percent.

But early budget figures suggest the planned deficit cut of more than 20 billion euros in 2010 is too ambitious due to a economic contraction seen at 4 percent of GDP, the country’s deepest recession since 1974.

“I think the Greek government’s chances of implementing the deficit target this year is 30 percent,” said Diego Iscaro, London-based analyst with IHS Global Insight. “This reflects risks both on the tax revenue and on the spending side.”

Gross tax receipts between January and April rose 6 percent year-on-year, far below an 11 percent target. The finance ministry said on May 25 it had fired 20 heads of regional tax offices for missing their collection targets.

“It’s already whispered in finance ministry corridors that the deficit won’t fall below 9.5 percent this year” said George Romanias, an economist with Greece’s main labor union GSEE.


Construction, a key growth engine over the past years accounting for about 10 percent of GDP, has virtually screeched to a halt after the government boosted property taxes in March.

“Building has dropped dead after the measures,” Dimitris Kapsimalis, head of Greece’s home-builders’ association, told Reuters.

The government expects to raise about 2.5 billion euros this year and next by its property tax increases and by sales of pardons for past building code violations.

But a virtual freeze in real estate deals that followed the measures stands to cost Greece about 1.5 billion euros in lost transaction tax revenues, says the Athens Real Estate Brokers’ Association.

The building industry, which employed about 400,000 people at its peak in 2005, is currently employing barely half that, Kapsimalis said.

Greek unemployment climbed to 12.1 percent in February, its highest monthly level on record and above an average 2010 estimate of 11.8 percent foreseen in the bailout plan.

Higher unemployment may force the government to spend more on jobless benefits than previously expected. Unemployment agency OAED is already selling bonds and shares in its portfolio at firesale prices to pay out jobless benefits, Romanias said.

State grants to OAE, the pension fund of the self-employed OAEE, have already reached 65 percent of funds earmarked for the full year, as small businesses close or delay contributions.

About 60,000 smaller retailers, around a third of the total, are expected to shut down by the end of the year, said Vassilis Korkidis, chairman of Trade Association ESEE.

Squeezed by a four-point VAT hike to 23 percent and an estimated loss of households’ purchasing power of about 10 percent as a result of public sector pay cuts, smaller retail players are in danger of vanishing.

“Turnover is down 30 percent year-on-year,” Korkidis told Reuters. “Many shops don’t see a single customer for days.”

Fuel tax increases, which have boosted the price of unleaded gasoline by 36 percent to 1.52 euros a liter since February, have shrunk sales volume by up to 15 percent, refinery sources say, casting doubt on a target to generate about 1.5 billion euros in additional revenues.


Tourism, Greece’s biggest foreign currency (Read more about trading foreign currency. earner, will not be a big help this year either. Tourism receipts are set to shrink for a second consecutive year, by up to 15 percent, as strikes and violence sparked by austerity scares visitors away.

About 30,000 room reservations were canceled in Athens alone after protesters set fire to a bank in May, killing three people, according to the country’s hotel association POX. “They say that any publicity is good publicity, but that’s not the case in tourism,” said Athens hotelier Alexandros Vassilikos.

Any deficit slippage could quell Greek hopes to return to financial markets as early as next year, sooner than the EU/IMF deal’s assumption that this will happen in 2012.

“It’s important for markets to see Greece meeting their targets,” said Iscaro at IHS Global Insight.

“If Greece comes out with a deficit of about 9.5 percent in 2010, then concerns will rise that the only way out will be debt restructuring. Obviously, it would then be much more difficult to return to markets as early as 2011.”

Still, analysts say the sheer size of the austerity measures will reduce the deficit by a degree comfortable enough for the IMF and the EU to continue funding Greece.

“As long as Greece comes close to meeting its 2010 target and implements additional measures to ensure that it achieves its 2011 goal, I doubt the EU and the IMF would withdraw their support,” May said.

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(Editing by Jon Hemming and Stephen Nisbet)

Greek budget goal too ambitious as austerity hits