Economy and Finance Minister Giorgos Alogoskoufis said yesterday that extensive illegal trading in fuel and cigarettes was the main cause of the large shortfall in budget revenues.

According to ministry data, value-added tax (VAT) proceeds in the year’s first two months were down 12 percent year-on-year. Ministry officials said the sharp drop was due to a fall in building activity compared to the same month of 2004, when a large number of infrastructure and Olympic projects were still ongoing.

Alogoskoufis said that even large companies are involved in the illegal fuel trading, and that checks to battle the scourge have been intensified this year. A sweep in the Peloponnese yesterday netted a construction company with illegal tanks containing 36,000 liters of heating fuel, which is used instead of the more heavily taxed automotive diesel, and 44 trucks and 26 construction machines using the fuel. Further investigation revealed a local gasoline station which had distributed some 3.6 million liters of heating fuel with forged invoices. Checks so far this year have revealed additional quantities of illegally traded automotive diesel in excess of 3 million liters.

The revenue shortfall seems to have rebuffed Deputy Finance Minister Adam Regouzas’s confidence last year that new sources of inflows would be found and tapped. The government is now finding that the traditional sources of VAT and tax on companies and organizations do not suffice to meet the targets set, but remains averse to introducing other unpopular taxes.

The only piece of good news comes from the collection of outstanding dues, which had been ascertained at a total of 1.95 billion euros and of which about 1.05 billion have been paid so far.

Another source of revenue which the government plans to tap in order to pay down public debt is privatizations, from which it hopes to raise 1.6 billion euros.

Alogoskoufis said the government has been in continuous contact with France’s Credit Agricole, which is interested in increasing its 9 percent stake in Emporiki Bank. The government controls, directly and indirectly, 43 percent of Emporiki, but any sale would depend on the resolution of the issue of its large unfunded social insurance liabilities, in line with International Financial Reporting Standards (IFRS) which the European Union has made mandatory this year. Analysts estimate these liabilities at about 450 million euros and the government has said it is considering a share capital increase to meet the requirement.

Bank management and employee unions have held a series of meetings on the issue but have yet to agree on a solution.

Further, Alogoskoufis told institutional investors in London on Wednesday that the government’s privatization plans include reducing its stakes in OTE Telecom and gaming company OPAP. This would involve the placement of a 10 percent stake in OTE, representing shares from a convertible bond which expires in August, and the sale of at least 15 percent of OPAP. The government’s holdings in the two corporations are now 37.7 percent and 51 percent respectively.