Greece faces longer recession if cuts not delayed, study finds

Greece faces a longer recession if the country is forced by EU peers to apply cuts worth 11.6 billion euros ($14.4 billion) over two years instead of four, a state-sponsored study said on Tuesday.

“In the case where the 11.6 billion euros in agreed government spending cuts are implemented (over) a two-year period, we adopt the hypothesis that the 2012 recession will continue in 2013 and 2014,» the Center of Planning and Economic Research (KEPE) said in a bulletin.

Greece has been seeking additional time to make the cuts, agreed to in return for loans from the EU, the IMF and the European Central Bank.

“In an alternative set-up where fiscal consolidation expands over a four-year horizon…recession is estimated at 1.8 percent in 2013 and nil in 2014,» the center said.

KEPE noted that in order to maintain an IMF target of debt-to-output ratio of 120 percent by 2020, Greece also needs lower the interest paid on its outstanding debt.

And a planned recapitalization of Greek banks would also have to be financed directly through EU rescue funds — a method likely to be applied in Spain — so as not to further burden the Greek public debt, the study argues.

Rejecting any fiscal adjustment extension, international creditors have been demanding that Athens catch up with time lost earlier this year when back-to-back elections were held, placing the reform drive on standstill.

The Greek cuts package was originally to have been adopted in June, and a privatization push calculated to earn 19 billion euros by 2015 is also behind schedule.

It is now expected to be finalized next week, shortly after the arrival on Friday of senior auditors from the so-called troika of creditors.

German Finance Minister Wolfgang Schaeuble insisted Tuesday that Greece must stick to its reform promises to unlock bailout cash the debt-wracked country needs to stave off default and stay in the eurozone.

A positive report from the ‘troika’ is essential for Greece to get the next 31.5-billion-euro installment of funds to keep it afloat. [AFP]

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