SCENARIOS-Can Greece cut its deficit by 11 points by 2014?

By Ingrid Melander

ATHENS, May 4 (BestGrowthStock) – Greece has signed up to a package
of austerity measures designed to cut its deficit by 11
percentage points between 2009 and 2014, an aim that will deepen
the recession and could spark a social backlash.

The measures agreed this weekend with the EU and IMF include
more tax hikes and steeper cuts in wages and bonuses, in return
for a record 110 billion euro ($146.5 billion) bailout.
[ID:nLDE64107I]

According to the aid plan, Greece will have to save an extra
30 billion euros on top of tough measures already taken but will
take two years longer than initially planned to bring its budget
deficit below 3 percent of GDP.

Markets have reacted coolly to the bailout package, with
investors concerned about its viability and the impact of
further belt-tightening on an economy already in recession.

EU and IMF officials warned Greece would have to take more
austerity steps if those already agreed are not enough to meet
fiscal targets. [ID:nLAW002135]

Based on conversations with analysts and comparisons with
other EU/IMF bailouts, here are three scenarios Greece faces,
with implications for financial markets:

GOVERNMENT MEETS FISCAL TARGETS

SCENARIO: Helped by the extra austerity measures and a
successful crackdown on waste and tax evasion, the government
manages to cut the deficit by 11 percentage points by 2014.

PROBABILITY: Low. Analysts say the new target to cut the
deficit below 3 percent in 2014 is more realistic than the
previous 2012 target, but say risks are still high, with
increasing public opposition and a bleak economic outlook
the main dangers.

The additional austerity measures will hurt an economy
already in the doldrums, pushing GDP down 4.0 percent this year
and by 2.6 percent in 2011, according to the government. This
would amount to Greece’s longest recession in 30 years.
Deflation would complicate plans to keep debt levels steady
between 2011 and 2013, and reduce them from 2014.

Public opposition to the measures has been rather muted so
far but is on the rise and analysts say keeping public backing
for three years of austerity will be tough as Greeks are prone
to street protests and reluctant to pay taxes.

MARKET IMPLICATIONS: A deficit cut of 11 percentage points
by 2014 would be a positive surprise for investors and make it
easier for Greece to tap financial markets sooner.

GREECE WIDELY MISSES BUDGET TARGETS

SCENARIO: The economy shrinks more than expected or does not
start growing again in 2012, with tax revenues collapsing and
Greece widely missing its deficit targets.

PROBABILITY: Average. The chances of widely missing the
targets will increase if the recession is deeper than the 4
percent contraction forecast for this year or persists longer
than forecast.

Social unrest could intensify if the unemployment rate
pushes over 11 percent and that could prevent Prime Minister
George Papandreou’s government from pushing reforms. Labour
unions have already vowed to resist further austerity.

Even without social unrest, cutting deficits in times of
economic downturn is extremely difficult, as shown by the
examples of three non-euro-zone EU states that pledged to trim
public finance shortfalls as part of EU and IMF aid packages.

Latvia agreed with the IMF to aim for a fiscal deficit of 5
percent of GDP last year but ended with almost double that after
austerity measures exacerbated an economic contraction of 18
percent that was more than three times worse than forecast.

IMF borrower Romania also saw its deficit rise from an
original pledge of 4.6 percent of GDP in 2009 to 8.3 percent,
and Hungary targeted a 2.9 percent of GDP deficit, but finished
at 4 percent. All three had to renegotiate targets.

MARKET IMPLICATIONS: Political instability in Greece would
strongly damage hopes of Greece managing its debt, increasing
the prospects of a debt restructuring or default. This would
raise pressure on Greece to withdraw from the euro zone, at
least temporarily, and could undermine the credibility of the
European single currency. It would also raise market pressure on
euro zone periphery states like Portugal and Spain, potentially
making it more expensive for them to borrow.

GREECE CUTS DEFICIT MODERATELY, MISSES TARGET

SCENARIO: Greece implements reforms but the new measures
lead to a deeper recession that prevents the government from
fully meeting its deficit-cutting targets.

PROBABILITY: High. The Greek public sector is in such
disarray that even elementary spending and structural reforms
could generate significant deficit cuts, despite the recession.
The government has already legislated wage and pension cuts in
the public sector of about 2.7 billion euros.

Defence spending cuts of 460 million euros are also
underway. The government has capped pharmaceuticals prices by
about 1 billion euros to limit hospital spending. The EU has
pledged to speed up disbursement of an extra 1.4 billion euros
earmarked for infrastructure.

But a deeper recession would mean higher unemployment and
cast doubt on plans to save an additional 30 billion euros
through public spending cuts and increased tax collection.

MARKET IMPLICATIONS: A slower than forecast deficit cut
would not be a surprise but would create the impression that
Greece has fallen short of its targets, possibly weighing on
investor confidence and delaying the nation’s return to markets.

Investment Analysis

(Additional reporting by Harry Papachristou and Mike Winfrey;
Editing by Noah Barkin, John Stonestreet)

SCENARIOS-Can Greece cut its deficit by 11 points by 2014?