Greek economy stuck in recession, complicates fiscal efforts

Reuters/Athens

Venizelos: Budget completes an intense and difficult effort

Greece will remain trapped in recession next year, threatening the country’s efforts to cut deficits and claw its way out of a debt crisis shaking the eurozone, budget figures showed yesterday.The economy will suffer a fourth consecutive year of contraction, shrinking by 2.5% in 2012 after an expected 5.5% slump this year, according to the 2012 budget draft submitted to parliament after talks with international lenders.The grim numbers are in line with recent forecasts by the IMF, but much worse than forecasts used in July to calculate a second, €109bn rescue package which anticipated a return to 0.6% growth next year.The government has admitted it will miss its budget targets for this year and decided on fresh austerity measures to meet a new, revised target for 2012. The budget plan predicts a deficit of 8.5% of gross domestic product for 2011, well off the 7.6% goal agreed with the European Union and IMF.Finance Minister Evangelos Venizelos said the budget marked a key transition from chronic deficits to a primary surplus, excluding the country’s huge debt service costs.However, he warned that this year’s shortfall could be still higher at 9% of GDP if citizens fail to comply with the extra measures, notably a new property tax which leftist parties have urged people not to pay.“The 2012 budget completes an intense and difficult effort of fiscal adjustment, reaching a primary surplus of €3.2bn in 2012 from a primary deficit of 24bn in 2009,” Venizelos said.Analysts said that the 2011 budget slippage will complicate ongoing talks about the country’s second bailout.“In the political debate in Germany it will most likely be used as an argument to reopen the whole rescue package, asking private bondholders to make a bigger contribution,” said Holger Schmieding, an economist at Berenberg Bank.If Greece’s international lenders, also known as the “troika”, conclude in a report to be issued this month that recession will continue to be worse than predicted, EU officials have suggested that banks that agreed in July to write off 21% of the value of their Greek debt holdings may be forced to take deeper losses.“It won’t be easy for the German parliament to pass the second bailout in its current form,” Schmieding said.Greece’s debt is expected to rise to nearly 173% of GDP next year from about 162% in 2011, the budget draft said. Growth is a key factor in determining whether this debt is sustainable or whether the country will have to default.Tough new measures, including the property tax and public sector layoffs, are meant to narrow the budget gap to 6.8% of GDP in 2012, slightly higher than the 6.5% goal agreed with international inspectors in July, due to a deeper recession.About 30,000 civil servants will be put in a so-called “Labour Reserve,” effectively a one-year waiting room for dismissal, on 60% of their salary. Greeks must also pay as much as €16 a year for each square metre of real estate they own.Hundreds of demonstrators took again to the streets yesterday to protest against budget cuts and EU/IMF-imposed reforms to open up its sclerotic economy.The jobless rate is expected to hit a record 16.4% in 2012 from 15.3% this year, according to the budget draft. Youth unemployment is more than twice the national average.EU/IMF inspectors are still combing through public accounts and have not yet agreed to pay out a lifeline bailout tranche of €8bn under the 110bn rescue plan agreed last year.