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BY COSTIS STAMBOLIS
Last week saw Greece’s bond markets near collapse in what turned out to be an unprecedented chain of events by eurozone standards. Greek government two year bond yields were hit hard having risen by 1.3 percentage points signaling investor anxiety over the state of the economy.
The turmoil in the bond markets was preceded by a downgrade of the Greek economy on December 8 by the international rating agency Fitch to BBB plus from A-minus. A day earlier, another credit rating agency, Standard & Poor’s, had warned the Greek government that it was putting the economy on credit watch with a probable downgrade within a month. S&P’s current rating of the Greek economy is at A-minus. At the same time the Athens Stock Exchange general index took a dive with the banking sector sell-off reflecting poor market sentiment.
According to several European analysts, the Greek economy is fast becoming the most problematic in the eurozone as key economic statistics point to a wildly underperforming economy with most key statistics wide off the mark in comparison with all other eurozone countries.
The debt to GDP ratio is set to become the highest in the eurozone next year, and one of the highest in the OECD, at 123%, with the actual external debt above 300 bln euros, while the budget deficit is set to rise to 12.7% in 2010, according to the latest government forecasts.
According to brokerage circles in Athens the cost to insure Greek bonds against default has risen above that of several emerging economies such as Vietnam reflecting the deteriorating view of key market players.
Following several years of substantial growth driven by strong consumer demand that took GDP growth above 4.0% every year for the most part of the decade, the boom ended suddenly this year. According to latest government data the economy is now shrinking by more than 1.0% annually with 0.3% forecasted for 2010.
The PASOK socialist government, lead by premier George Papandreou, which came into power early in October, presented to parliament its 2010 budget last month. The budget was supposed to address the country’s worsening financial situation by introducing substantial cost cuts in government spending and by curbing Greece’s huge public sector which employs more than 1 mln people. George Papaconstantinou, the finance minister, aimed at budget deficit reduction by 3.6%, down to 9.1% from the current 12.7% but without making drastic cuts in wages or actually reducing the public sector machinery.
The European Commission expressed its bitter disappointment over the budget which it found lacking in concrete and determined measures. Now that the government has come under sharp attack from the markets, as it was evidenced last week, it is reconsidering its overall position with Mr. Papaconstantinou saying at a recent press conference that the government will do everything that is required to bring the situation under control.
“We will reduce the deficit,we will control the debt, and there will be no need for a bailout. We are not Iceland. We are not Dubai,” he said while confirming the government’s plans to introduce a supplementary budget early next year in order to comply with EU’s ultimatum.
