FRANKFURT (MNI) – Greece should post a deficit of 7.5% of GDP in
2011 and 6.5% of GDP by 2012, not far from the official targets under
the EU/IMF economic program the country is in, the OECD said in its
Economic Outlook, published Wednesday.

However, the OECD warned that this outlook is fraught with downside
risks and Greek authorities must urgently comply with the EU/IMF
conditions and push ahead with reform efforts.

“Adherence to the fiscal and structural adjustment program, agreed
in May 2010 with the EU and the IMF, is indispensable for restoring
credibility and market confidence, long-term public debt sustainability
and competitiveness,” the report said.

“Success depends crucially on rigorous expenditure control and
further progress in fighting tax evasion, combined with comprehensive
reforms to address chronic rigidities in fiscal management, and in
labour and product markets,” it added.

Even including expected privatization receipts, public debt is
projected to rise to over 150% of GDP by end-2012, underscoring “the
imperative nature of continued fiscal consolidation and the need for
further structural fiscal reforms.”

The OECD’s forecasts assume that the 10-year government bond
differential vis-a-vis Germany, which rose to almost 10 percentage
points on average in April, will remain constant for the remainder of
2011 and then fall in 2012 as the fiscal and structural programs bear
fruit.

On the economic outlook, the report said that the economy should
continue to contract in 2011 “but at a slower pace of around 3%, as the
impact of the frontloaded fiscal adjustment on the economy wears off.”

In 2012, the economy should begin to expand (+0.6%) as investment
and exports pick up on the back of competitiveness-enhancing structural
reforms and strengthening external demand. “Faster absorption of the
European Union structural funds should also act as a stimulus,” the OECD
said.

Inflation should fall to 2.9% in 2011 from 4.7% in 2010 and
decelerate even more rapidly to 0.7% in 2012 “as the unemployment rate
edges up to over 16% in 2012 and substantial economic slack persists,”
the report said.

The OECD cautioned that “the path to sustainable public finances
and renewed economic growth is clearly fraught with risks.”

“Many things could go wrong in the international sphere, including
further loss of confidence or a marked weakening in export markets,” the
OECD said. Domestically, a slowdown of fiscal adjustment and structural
reform effects could damage credibility and further aggravate the
situation, the OECD said.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$X$$$,M$$EC$,MI$$$$,M$$CR$]