–Adds Economic Projections, Comments On Privatization, Greece Progress
By Angelika Papamiltiadou
BRUSSELS (MNI) – A long-anticipated report on Greece by the
European Commission and European Central Bank — two-thirds of the
so-called Troika — recommends that Athens should be given an additional
two years, from 2014 to 2016, to achieve its fiscal objectives.
The draft report, obtained by MNI, says that the two-year extension
will cost an additional E17.6 billion, though it does not provide
details of how the money will be raised.
Interestingly, the report does not provide any assessment of
Greece’s debt sustainability, which is a key component for further
decisions on Greece, including whether and when to release the delayed
E31.5 billion loan tranche that Greece desperately needs. Greece’s
bailout program stipulates that the country is expected to reduce its
debt ratio to 120% of GDP by 2020, from the just-under 190% level
expected next year.
Greece’s official creditors largely acknowledge that is a virtually
impossible goal, and the number is likely to be closer to 150% eight
years from now.
The Greek government had sought the two-year extension in order to
soften the blow of austerity measures amidst a deeper-than-expected
recession that will enter its sixth year in 2013.
“The two-year extension of the adjustment period will mitigate the
impact on the economy, while securing a sustainable fiscal position,”
the report says. “Under the revised adjustment path, the primary balance
targets have been set at 0%, 1.5%, 3% and 4.5% of GDP for the four-year
period 2013-2016, respectively.”
It adds that, “the deficit cutting measures needed to reach the
revised primary balance targets amount to E9.2 billion and E13.5 billion
in 2013 and 2014, respectively, in cumulative terms. The revised path
for the primary balance means that the general government budget deficit
would fall below 3% of GDP in 2016, two years later than originally
envisaged.”
The European part of the Troika warns that “the extension of the
adjustment period should not be seen as a way to reduce the effort [by
Greece], which would weaken the credibility of the program.”
The fiscal effort undertaken to achieve the target in 2013-14
remains very large and heavily frontloaded. Even though the primary
balance is only expected to improve by 1.5% of GDP, this is in itself a
large change in the face of a further deepening of the economic
recession.
The report highlights the fact that Greece will need additional
funding even without the 2-year extension period, because of revenues
shortfall from the privatization program and the recession.
The extension itself will require additional funding of E17.6
billion.
“Financing needs for the Greek sovereign have to be increased also
for the period 2015-16 given the higher debt profile, but also as access
to capital markets remains uncertain,” the report says.
“Market access depends on many factors. Even though the perception
of the overall policies and credibility of the government could improve
significantly after two years of successful program implementation, it
is prudent to assume that markets may remain sceptical about Greece for
a longer period, given the vulnerability resulting from the high debt
ratio and political risks,” it continues.
“Additional financing needs for 2015-16 amount to E14.1 billion if
the originally scheduled fiscal adjustment path is maintained, and to
E17.6 billion if the fiscal adjustment path is extended by two years,”
the report adds.
The report says that the extreme uncertainty surrounding
developments in Greece impacted the economy even beyond Greece, and this
still affects the program going forward.
According to the economic projections in the report, the Greek
economy is expected to decline for a fifth successive year in 2012 with
output falling by some 6.0%, then again in 2013, when GDP is expected to
contract by a further 4.3%.
The turning point of the recession is not expected until late 2013,
leading to moderate GDP growth of 0.6% in 2014 followed by stronger
upturns of 2.9% and 3.7%, respectively, in 2015 and 2016. The recovery
is dependent upon the return of business confidence and investment,
boosted by the implementation of reforms under the economic adjustment
program, as well as progress with major projects co-financed by EU
funds, the report says.
Overall, “the program strategy remains valid, but its focus on
structural reforms to unlock growth and employment has been
strengthened,” the report says. It acknowledges the efforts made by the
coalition government in Athens, but stresses that efforts must continue
on the structural reforms front and privatization fronts.
“The privatisation plan has been disappointing so far, but has
regained momentum since September 2012,” the ECB and European Commission
say. However, doubts about the effectiveness of the privatisation
process persist, which requires setting better incentives for delivering
higher proceeds while contributing to better industry practices, more
investment and net job creation.
–Brussels bureau, apapamiltiadou@mni-news.com
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