A marathon to propriety
Spending overruns in Olympic projects have increased the urgency for Greece to get a grip on its fiscal imbalances, or it risks its credit rating coming under pressure, rating agency Standard & Poor’s (S&P) said in a report released yesterday. Although Greece’s convergence with the other European Union economies and its high growth rates make the Greek public debt sustainable on a medium-term basis, S&P cautions that «delays in the implementation of structural reform or significant fiscal slippage could pressure the ratings» (now A+ with a stable outlook). «The post-Olympics tasks facing the government are related to a stubbornly high public debt ratio, lack of budgetary transparency, weak expenditure discipline, and adverse demographics,» said Standard & Poor’s credit analyst Eileen Zhang. «All of these issues look set to be compounded by a more subdued prospect for economic growth, especially in the domestic demand components, once the Olympics stimulus fades.» The Olympic Games have given Greece «an opportunity to demonstrate how it has transformed itself from an agrarian-dominated society to a modern, diversified and increasingly open economy,» S&P says. The author of the report points out, however, that the additional spending as part of the effort for completion of Olympic projects in time, and special Olympic bonuses to civil servants and security forces have pushed the total cost further up from the initial budget of 4.6 billion euros. This is now estimated at around 6.1 billion, or 3.7 percent of gross domestic product, and is likely to rise even more. As a result, S&P now calculates that Greek public borrowing requirements for this year will rise from 26.3 billion euros forecast by the previous government to more than 40 billion. This development may also hinder efforts to bring public debt below the current level of 103 percent of GDP. The report notes that the challenge for preparing for the Olympics has raised awareness of the need for fiscal reform. «Nevertheless, the magnitude of the task is still sobering and strongly suggests that there is no time to waste if the buildup of an unsustainable imbalance in Greek public finances over the longer term is to be avoided,» the report says. S&P says fiscal improvements must come from a more disciplined approach in spending, particularly in view of the fact that the present government plans to reduce the overall tax burden. Such an approach is made more necessary by the prospect of rising interest rates, which will increase the difficulties of debt servicing. «Correcting the imbalances will make the post-Olympic cleanup look more like a marathon than a 100-meter dash,» S&P said. Commenting on the report, Economy and Finance Minister Giorgos Alogoskoufis said it vindicates the government’s decision to launch a thorough stocktaking of public finances, necessitated by the lack of transparency in the methods used by the previous government which made a fiscal cleanup impossible. «The government will achieve the fiscal cleanup, implementing its program for growth, employment and social cohesion,» he said.