Outgoing conservatives pledge belt-tightening
By George Georgiopoulos (Reuters) – Greeks head to the polls on October 4 with the economy in its worst shape in years and fiscal health warnings flashing red, knowing that whoever wins the election faces big budgetary headaches.
The global downturn has tripped the consumer-driven boom Greece enjoyed after adopting the euro in 2001, exacerbating public finance woes and putting the opposition socialists ahead in opinion polls.
"Improving the state of public finances is a paramount challenge, as weak primary expenditures discipline has been perpetuating the deficit situation," said Marko Mrsnik, an associate director at ratings agency Standard & Poor's.
"Another challenge is related to competitiveness, which has been eroded due to a persistent inflation differential with the rest of the EMU and diverging unit labour costs," he said.
Greece missed an opportunity for budgetary consolidation during the high-growth years. The conservatives took steps in the right direction in 2004-06 but spending slippages returned in 2007-08, derailing budget plans, analysts say.
Initially holding up better during the global economic crisis than many other countries, Greece is now on the verge of recession as confidence and tourism slumps. Public finances are strained, leaving little room for manoeuvre.
FISCAL WOES
Conservative Prime Minister Costas Karamanlis called the snap polls asking for a fresh mandate to deliver what he says will be bolder measures to avert a crisis.
The downturn has caused the Greek deficit to swell, topping 5 percent of GDP, making this year's 3.7 percent target — itself above the European Union's 3 percent ceiling — out of reach. Public debt is seen rising to 103.4 percent of GDP this year, devouring about 12 billion euros a year for servicing.
Fiscal shortfalls have forced the government to borrow 52 billion euros so far this year — enough money to buy 100 percent of all of the Athens stock exchange's 20 biggest blue chip companies, or 69 percent of the entire stock market.
Unlike Belgium, which managed to bring its debt-to-GDP ratio down to 89 percent in 2008 from 133 percent in 1993, Greece's debt mountain is expected to hit 108 percent next year, based on EU Commission forecasts.
Although trailing by about 6 percentage points in opinion polls, Karamanlis has promised if re-elected to freeze public sector hirings and salaries next year and pledged again to fight tax evasion.
Conservatives say they will continue their policy of privatisations with nickel producer Larco, water utility EYATH and gas monopoly DEPA on the state divestments agenda to raise proceeds to pay down public debt.
The socialists say they will cut government waste and hike taxes on the rich but also absorb more EU funds by matching outlays via the government's investment programme. Their leader, George Papandreou, blasted the government for cutting corporate taxes by 10 percentage points and pledged above-inflation public sector pay rises.
He also questioned the recent privatisation of loss-making Olympic Airlines and OTE Telecom, saying a public-private partnership would be preferable.
"The socialists' economic plan is likely to appear more attractive to voters, not burdening salaried workers, small business owners and pensioners," said political analyst Anthony Livanios at Alfa Metrics pollsters. "The government's economic plan has a more austere look, hitting these groups."
LONG-TERM CHALLENGES There are additional, longer-term challenges — the budgetary impact from an ageing population because of healthcare and pension spending. Left unchecked, this may put public finances under more pressure.
Ominously perhaps, neither major party has spelled out how they will deal with these long-term problems, and the socialists say the retirement age does not have to be raised.
"Above all, we will be looking at the strategy to tackle these challenges by whichever government is elected. If there are structural improvements that may lead to debt reduction and measures to contain the age-related spending, ratings could be raised," S&P's Mrsnik said.
"But continued weakening of public finances could bring ratings under downward pressure." Greece is currently rated A- by S&P, the lowest among euro zone members, with a stable outlook.
Yield spreads of Greek government debt over benchmark German bunds are up about 20-25 basis points since snap polls were called. They had spiked to around 300 basis points earlier this year as risk-averse investors looked for safer ground.
Analysts say the worst scenario would be for no party to win outright, plunging Greece into political uncertainty. Polls show that although the socialists are leading, they may not gather enough votes to form a government, resulting in a repeat vote. "Markets will put more emphasis on whether there will be a stable government rather than focusing on party manifestos, or on who will implement what, at least in the short term," said Citigroup economist Giada Giani.
