By Angelika Papamiltiadou

ATHENS (MNI) – A delegation of officials from the European
Commission, the European Central Bank and the International Monetary
Fund will begin today a 2-week inspection of the Greek economy to decide
whether the country should receive a second loan instalment from the
E110 billion aid deal agreed in early May.

The second instalment would be E9 billion, including E6.5 billion
from Eurozone member states and E2.5 billion from the IMF. The first
instalment was E20 billion, with E14.5 billion coming from the Eurozone
and E5.5 billion from the IMF.

The visiting officials plan to evaluate the progress of the Greek
government’s austerity plan and are expected to uncover any weaknesses
and delays in its implementation.

However, the decision to grant the second instalment was virtually
approved in advance, after first-half preliminary data showed a 42%
reduction in the government deficit. During July’s meeting of the 16
Eurozone finance ministers, known as the Eurogroup, its president
Jean-Claude Juncker said that Greece had “exceeded our expectations,”
while in interim reports published ahead of the visit, both the
Commission and the IMF said the Greek plan seemed to be “broadly on
track.”

Preliminary data also have shown that spending cuts are within
target, though revenues are below expectations as the country faces a 4%
contraction of GDP this year, combined with inflation above 5% and
drastic cuts in salaries, pensions and benefits which have resulted in
slumping consumption and a liquidity squeeze.

During their visit, the EC-IMF-ECB officials are expected to make
more in-depth checks of the Greek fiscal data, since the extent of the
state’s loan obligations is not yet fully known. Finance minister George
Papaconstantinou has already said that the debt and deficits of public
companies (mainly in the transport sector), which have been feeding off
the state budget for years, will be counted in the debt and deficit
figures of the general government.

This means that the figures included in the Greek plan are expected
to be revised upwards. According to Eurostat, the figures for fiscal
year 2009 are also pending final approval due to a dispute over the
method of calculation used for writing down hospital arrears.

According to commission sources, the first upward revision is
expected to be 0.5% of GDP for the deficit and 4% for the public debt.
But those figures will likely rise once there is a more complete picture
of how much the state owes in the health, local government, social
security and public utilities sectors.

Given delays in the data and concerns over its quality — which
have drawn repeated warnings from the European Commission and the IMF —
it seems unlikely there would be a full and clear picture of the state’s
liabilities during this visit. Delays in the collection of the data have
been reported in health and public administration, while a new head of
the Greek statistic service ELSTAT was only appointed recently.

Under the terms of the lending agreement signed by Greece, all
major ministries, public companies and organizations must publish their
monthly spending and revenue reports, which they have not done yet.

It was widely reported in the Greek press that during the last
ministerial meeting there was a heated disagreement when
Papaconstantinou requested that officials reporting to him be present at
all meetings between other ministries and the EC-IMF-ECB team, “in order
to keep track.”

According to press reports, a compromise was reached under which
there would be regular ministerial meetings supervised by the finance
minister to ensure that decisions are in accordance with the agreement.

Apart from the Finance Ministry, the visiting inspectors are
expected to visit the ministries of Health, Transport and Economy, as
well as the Bank of Greece, the General Logistics Office (GLK), the
Greek statistics authority (ELSTAT), major public companies, and private
banks.

Following the austerity measures implemented last May, the
government subsequently managed to push through parliament changes in
the retirement and social security systems. It is also moving ahead with
labour market reform, energy market deregulation, and the opening up of
“closed” professions such as truck driving and architecture.

The visiting officials are expected to review the Economy
Ministry’s “growth law,” which aims to boost the flagging
competitiveness of the Greek economy. The Eurozone and the IMF have
asked the Greek government to take measure to boost economic activity
and combat inflation and unemployment, “while seeking an equitable
distribution of the adjustment burden across all levels of society and
protecting the most vulnerable.”

It has been widely argued that the progress achieved so far is
mainly based on drastic cuts in the income of public servants and
pensioners and the down-sizing of the public sector, while more needs to
be done to crack down on tax evasion and more effectively collect
value-added tax revenues.

The EC-ECB-IMF “troika” has also asked to be briefed on the
progress of the privatization plan, on an early draft of the 2011 budget
plan, and to be given written analysis of Greece’s bank stress tests.

State-run ATE Bank (Agricultural Bank of Greece) failed the
pan-European test and the government expressed its willingness to
participate in the bank’s recapitalization. The finance ministry has
asked ATE to present a restructuring plan within the next two months and
implement it by the end of the year. Both Papaconstantinou and Bank of
Greece governor George Provopoulos have repeatedly called on Greek banks
to merge with one another in order to ensure the sustainability of the
banking sector.

Piraeus Bank, one of the main Greek banks, has already submitted a
proposal to acquire two state-run banks — ailing ATE and Tachidromiko
Tamieftirio. Its offer is currently under consideration and the European
Commission has asked to be briefed on the terms of it.

The agreement between Greece, the IMF and the European Commission
says that new stress tests should be carried out in all Greek banks in
September and the banks that fail should immediately raise capital.
Failing banks would be put under the supervision of the Financial
Stability Fund, which was formed for this purpose.

The officials are expected to depart from Athens on August 6 in
order to draft a comprehensive interim report on the Greek economy.
Whether any further fiscal measures for this year are required will
depend on the total liabilities of the state. However, Papaconstantinou
has said he is confident that no additional measures will be needed.

In its report, the IMF said that “hospitals and social security
funds present clear risks” to the implementation of the 2010 budget. It
also says “it is not clear that the authorities can bring pension
expenditure down from 12.5% of GDP before the reform to 2.5% in one
step, as aimed for in the program.”

According to the Greek plan, in case spending and revenue targets
were not met, “adjustment measures” would need to be put into effect. In
such a scenario, the option currently discussed would be to extend
increases in indirect taxes on items such as tobacco, fuel, and
alcoholic beverages, which have already been raised twice and now stands
at 23%.

–Angelika Papamiltiadou, a_papamiltiadou@hotmail.com

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