The successful hosting of the 2004 Olympic Games may indeed open a new chapter for the Greek economy, enabling it to reap the benefits of substantial investments in the years to come. But in the short run, it may have to contend with some bad news, including a possible credit rating downgrade on the back of continued fiscal laxity. This means the conservative government has no option but to announce its economic plans and start doling out the medicine as soon as possible if it wants to avoid turning a short-term slump into a medium-term problem, depriving the economy of the benefits of the 2004 Olympics. The win of the conservative New Democracy party in early March was greeted with enthusiasm by many who wanted a strong government committed to politically painful structural economic reforms. This enthusiasm waned a bit after it became clear the new government had other priorities, mainly the unification talks about Cyprus and the island’s smooth accession to the EU, a comfortable win in the elections for the European Parliament in June and, most importantly, the success of the Olympic Games. Economic initiatives were limited to promoting budgetary transparency and paved the way for a more restrictive incomes and fiscal policy for 2005 and beyond. Looking back, there is no doubt that the government did pretty well on all these fronts with the possible exception of the talks for the unification of Cyprus. Even though the government’s strategy appears to have paid off politically, it has done little to reverse a worrisome trend in public finances which threatens the sustainability of high GDP growth rates in the post-Olympics era. Forced to cope with higher-than-expected costs, partially related to the Olympic Games and a large amount of maturing debt, the State borrowed extra billions of euros in the first half, driving the debt of the central government to 195.7 billion euros at the end of June with cash reserves standing at some 4.2 billion euros. It should be noted, however, that the decision to borrow an extra amount of money was also influenced by the prevailing low interest rates and the need for cash to cope with any unforeseen costs related to the Olympic Games. The 2003 budget deficit is expected to be revised higher to about 4.0 percent of GDP from an estimated 1.7 percent by the previous Socialist administration, and a revised 3.2 percent by the current government. This year’s budget deficit is looking set to outpace even that, exceeding easily the 4.0 percent of GDP mark. The significant deterioration in Greek public finances has already caught the attention of well-known banks, credit rating agencies and international organizations, some of which are sending their delegations to Athens to discuss developments with the Greek government in the next couple of weeks or so. Already, Standard & Poor’s has made it clear that «delays in the implementation of structural reforms or significant fiscal slippage could pressure the ratings.» Greece is rated «A+» by S&P with a stable outlook. Preserving this rating, the lowest in the eurozone, and even upgrading is very important for the country as it affects the yields of its medium-to-long-term debt instruments and therefore its cost of borrowing. Olympics cost overruns along with demands from civil servants, police and others to be paid an extra amount of some 2,500 euros per person as an «Olympic bonus» has definitely contributed to the projected widening of the budget deficit this year and last, prompting the country to borrow some 40 billion euros according to S&P estimates, versus an amount of some 26.3 billion initially budgeted by the previous Socialist government in 2004. However, it would be incorrect to blame these cost overruns for Greece’s budgetary imbalances. After all, it would have been relatively easy for Greece to completely reverse the trend and grow out of its fiscal problem counting on sizable EU inflows along the way next year when these costs will not be present. Unfortunately, they are not. Greece’s fiscal problem runs deeper and goes beyond cost overruns linked to the Olympics. Greece’s impressive fiscal consolidation from 1994 onward relied heavily on the significant reduction of interest rates as the country pursued its EU dream and on the historically low euro interest rates later on. This development produced large savings for the budget in interest payments, boosted economic growth and brought in even more tax revenues. The closing of numerous tax loopholes also widened the tax base and helped fill state coffers with more money while it provided consecutive Greek governments with the means to hire more civil servants and pay higher salaries and pensions to civil servants to win over votes. The Greek economy though cannot count on lower interest payments any longer to reduce the budget deficit. With euro interest rates at historically low levels, the chances are Greece will have to pay a higher interest bill when euro interest rates start heading higher. Adverse demographics do not help either, while projections for slower GDP growth make things more challenging on the revenue side. This means the conservative government has no option but to limit primary spending growth over a number of years, an unpopular measure in a country with an excessive number of civil servants and greater public sector employees, if it is serious about correcting fiscal imbalances in the medium term. Government officials frequently refer to cutting waste in the public sector as a means of tackling the budget deficit and cutting the public debt-to-GDP ratio. This is definitely more politically convenient and easier to say than taking action to limit the growth of primary spending which is the main source of Greece’s fiscal imbalances. The government will have to make some moves in this direction at the same time it tries to take tax measures and others to make the Greek economy more competitive, and the sooner it does it, the better. To this extent, a jolt, such as a credit downgrade, may be what is needed to get things going.