Defense debt continues rising, hampering economy’s cleanup

Budget data for the January-August 2003 period, released with several days’ delay by the Finance Ministry last week, show a sharp deterioration. The deficit is up 91.7 percent year-on-year to 7.22 billion euros, against an annual target of 5.3 billion. There is an especially marked 54.8 percent shortfall in the revenues of the Public Investment Program, highlighting the difficulties involved in the management of European Union investment subsidies. Such revenue is down to 941 million euros, against 2.08 billion in the same period last year. Public debt interest payments rose 7.9 percent (compared to a target of 2.9 percent), while public revenue increased by 3.7 percent against a target of 5.1 percent. Public spending rose at a rate of 11.2 percent (target, 5.2 percent), heightening the concern posed by the flurry of demands for higher income from various groups. The data’s release was delayed beyond the end of September; it appears that this was part of an ultimately successful communication trick which shielded Economy and Finance Minister Nikos Christodoulakis from having to appear at the Cabinet meeting the week before and stand up for the grim results. Meanwhile, the country’s defense sector debt is galloping ahead, projected to reach 7 percent of Gross Domestic Product (GDP) by the end of 2004. The swelling is caused by the purchase of very expensive weapons systems and the large amounts required to repay old debts. The projected sharp further rise in defense debt will make it harder to tidy up the economy; it is estimated to reach 8.9 billion euros (6 percent of GDP) by the end of 2003 and 11.3 billion at the end of next year. Defense sector debt grew rapidly after 1996, after the Imia crisis that January brought Greece and Turkey on the brink of war over a crop of islets in the eastern Aegean. Since then, Greece has been spending about 3 billion euros annually on weapons systems, but only a part of this appears on official budget data; the rest becomes invisible with the help of the so-called «creative» accounting. As regards repayments of old defense debt, the budget target was for it to total 1.2 billion euros this year. However, the draft budget plan for 2004, which Christodoulakis unveiled last week, projects the expense to rise to 2.1 billion euros in 2003 and to 2.3 billion next year – a figure that appears rather unlikely given the tendency to underestimate expenses. Greece’s total public debt now stands at 154.8 billion euros. Presenting the draft budget, Christodoulakis said he hoped debt «will be reduced to 101.7 percent, perhaps more, of GDP this year and to 98.5 percent in 2004.» However, it is hard to square such hopes with the reality of additional costs arising in the prevailing opaque climate in arms orders. In some curious way, the network of middlemen in defense procurements always manages to impose its terms while claiming to be working for the creation of more jobs in Greek factories that will produce weapons systems jointly with foreign concerns. An element deliberately used to push up costs and justify the overruns («for national reasons») is Domestic Added Value (DAV). By citing DAV, the government helps opaqueness grow and strengthens relations with intertwined business interests. In the recent procurement of tanks, it was claimed that DAV will amount to as much as 40 percent; a monstrous myth with two unpleasant consequences. The first is that procedures remain murky and rewards intermediary companies that are supposed to be strengthened for being Greek. The second is the excessive cost that could be avoided if the government bought spare parts directly.