–Adds Comments On Medium-Term Growth, Tax Increases, Privatization

By Angelika Papamiltiadou

ATHENS (MNI) – Greece will not meet its 7.8% deficit target for
this year, despite the new austerity measures announced by the Greek
government recently, the European Commission and the ECB said in their
joint fifth review of Athens’ economic adjustment program.

According to a copy of the report, obtained by Market News
International, the Greek deficit will remain high in 2011, between
8.5%-9.0% of GDP, versus the official target of 7.8%. The Commission
expects the country’s deficit to fall to 6.8% of GDP in 2012, but it
said that additional fiscal measures might be needed.

The Greek Parliament is expected to vote this evening on a
multi-year fiscal plan, which would bring the deficit down to 2.9% in
2014. The vote is expected to pass with a majority of 154, out of 300
parliamentary seats.

According to the report, Greece will face a deeper-than-expected
recession this year and the next.

“The contraction in economic activity in 2011, now estimated at 5.5
percent, will be deeper than in 2010. The projections for 2012 are also
revised downwards to a contraction of 2.75 percent, and modest positive
growth rates are delayed to 2013,” the report said.

“Competitiveness is slowly improving: the constant-tax inflation
rate is below the euro-area average, while overall inflation has come
down as the impact of several waves of indirect tax increases in 2010
are now fading out,” the EU-ECB document stated.

The Commission recommended that the sixth tranche of a bailout loan
to Greece be disbursed “as soon as possible,” since “the agreed prior
actions on fiscal consolidation, privatisation and market reform, which
were announced by the government, have been legislated.”

This disbursement of an amount of EUR 5.8 billion will take place
under the bilateral loans pooled by the Commission, as agreed under the
Greek loan facility agreement of May 2010. The IMF is expected to
contribute an additional E2.2 billion to this disbursement, the report
said.

A Greek government official told MNI last week that the Eurogroup,
expected to meet Friday in Brussels, should be ready to approve the loan
tranche.

The medium-term growth prospects of Greece may need to be revised
downwards, as the previous outlook is viable only in case of a
pronounced acceleration of structural reform efforts, including
privatisation, the report said. “In the absence of such acceleration,
the medium-term real GDP growth rate could be well below projections.”

The assessment says that even though the Greek government has made
progress in the consolidation effort, “in a number of cases, the
quantification of the measures had to be revised downwards, because they
were implemented with delay, or with changes to their design reducing
their impact.” The performance criterion for end-July for the fiscal
primary deficit was respected, but the criterion for end-September
appears to have failed by a small margin, the report said.

It added that while the new measures announced by the government
should “bring the 2012 deficit projection in line with the agreed
ceiling, the 2011 fiscal gap will not be fully closed.” The 2011 fiscal
measures’ full effect will only be reflected in the 2012 accounts.

The Commission and the ECB appear to be against any further tax
increases in Greece, because “they substantially compress the
households’ disposable income and significantly tighten their liquidity
constraints.” This also implies that the uncertainty surrounding the
2011 fiscal projection is larger than one could expect at this time of
the year.

The report also said that Greece will miss its privatization
proceeds target in the near-term because of lengthy administrative and
legal procedures.

“The targets established for the next quarters are now beyond
reach,” it said. “On top of this, the market conditions have
significantly deteriorated over the last quarter, with the Athens stock
exchange index losing more than 38 percent from June through September.”

However, it added that since the Greek government is one of the EU
countries with the richest portfolio of assets, the objective of
collecting E35 billion by end-2014 and E50 billion by end-2015 remains
viable.

All the more so given that the Government stands ready to reduce
its stakes in state-held companies by more than currently considered in
the privatisation plan.

“In a medium-term perspective, the privatisation plan will have to
be adjusted and effectively scaled up to take into account the
reprivatisation of banks that might require recapitalisation by the
Greek state or the Hellenic Financial Stability Fund,” the report said.

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