Bank of Greece Governor Nicholas Garganas yesterday appeared optimistic about the economy’s growth prospects but concerned over persistent core inflation and possible loan defaults. Speaking to the board of directors of the Hellenic Banks’ Association during a business lunch he hosted, Garganas forecast that Greece’s gross domestic product (GDP) will expand 4 percent this year and that a high level of growth can be maintained in 2005. Garganas’s forecast is higher than that of the Ministry of Economy and Finance (3.8 percent) and is based on the assumption that the deceleration of GDP growth observed in the second quarter of the year will be reversed in the third and fourth quarters. For next year, Garganas estimates that maintaining high growth will depend on the implementation of further large infrastructure projects, especially in regions outside Attica. In short, he does not believe in a post-Olympic construction slump, provided that the absorption rate of European Union funds made available through the Third Community Support Framework accelerates. Garganas appeared concerned about inflation, which, he predicted, will accelerate during the fourth quarter to an average of 3.5 percent. For the entire year, average inflation will be close to 3 percent. Garganas explained that the lower inflation rates observed in the first half of the year were due to special circumstances, such as the steep decline in the prices of fresh fruit and vegetables (28 percent). But core inflation, which excludes fuel, fruit and vegetables, all volatile items, was running at a 4.2 percent annual pace in June, double that of most eurozone members. Garganas believes that core inflation will decline only through the shrinking of the large budget deficit and moderate wage rises. The government is faced with a budget deficit that could run as high as 5.3 percent of GDP this year and aims to reduce this to 2.8 percent of GDP next year in order to avoid EU sanctions. Economy and Finance Minister Giorgos Alogoskoufis has set a cap of 3 percent on ministries’ spending rises for the next year. So far, however, the requests of the ministries of Defense, Education and Health for 2005 exceed the 3 percent ceiling by far. Deputy Economy Minister Petros Doukas will negotiate with the various ministries over the budget appropriations, starting on Monday. Garganas warned his fellow bankers to increase their provisions for defaulting loans. According to sources, the Bank of Greece is especially concerned about the sudden acceleration in commercial loans, despite its forecasts to the contrary; in June, the rate of growth of consumer loans was 37 percent. Garganas also told the commercial banks to increase their capital adequacy ratios, taking advantage of their high profitability.