2004 deficit forecast keeps rising

The 2004 budget deficit may reach 6 percent of Greece’s gross domestic product (GDP), Deputy Finance Minister Petros Doukas told reporters yesterday, acknowledging that the government’s previous estimate of 5.3 percent had overestimated revenue from settlement of past years’ tax cases and from European Union fund inflows. The initial 2004 deficit, as estimated by the previous, Socialist government last year was 1.2 percent, later revised upward to 1.7 percent. The present conservative government, determined to show that its predecessor had misreported the figures, announced, soon after taking power in March, that the deficit would be 2.95 percent. Further probes by Eurostat, the EU’s statistics agency, which accepted the new government’s change of method in recording defense expenditure and VAT proceeds, as well as further upward revisions by the government itself, especially concerning the cost of the Olympic Games, had gradually brought the deficit estimate to 5.3 percent of GDP by September. According to the government’s methodology, budget deficits had exceeded the limit of 3 percent set for eurozone countries every year since 1997. Yesterday’s downgrade of Greece’s credit rating by international rating agency Fitch/IBCA came as no surprise. It had been preceded, on November 17, by Standard & Poor’s. Greece’s credit ratings were lowered to A from A+ by Fitch Ratings, which said the move followed a series of large upward revisions to government deficit data. The ratings agency said Greece was now off negative watch and the ratings outlook was stable. «The downgrade follows a series of large upward revisions to the general government deficit and debt figures for 1997-2003,» Fitch said in a statement. «The revised figures reveal that there has been virtually no progress in fiscal consolidation since Greece joined the euro area, despite economic growth averaging 4 percent since 1999. Not only is the initial starting point much worse, but the need to bring the budget under control is delaying much-needed reform of the pension system, already one of the most expensive in Europe,» said Chris Pryce, Director in Fitch’s Sovereign Group. Fitch’s statement further said the estimated ratios of public debt to gross domestic product and to revenues would be 112 percent and 260 percent respectively this year, compared to the prior expectation of 100 percent and 230 percent. «Consequently, the fiscal consolidation challenge facing Greece is greater than previously assessed,» Fitch added. The Greek government laid the blame for the downgrade on the previous government’s fiscal policies, adding the report backed its 2.8 percent budget deficit goal next year. «As noted in its report, the change in Greece’s credit rating by Fitch is due to the high deficit and state debt created by previous governments during 1997-2003,» the Economy and Finance Ministry said in a statement. Greek government bond yields briefly rose after the ratings downgrade and 10-year yields last traded at around 3.66 percent, little changed on the day. The yield spread with benchmark German Bunds was broadly unchanged at around 12 basis points (0.12 percent), which means markets expected the downgrade and that it is not expected to have any negative consequences for Greece’s debt. The ministry was even pleased by Fitch’s belief that the budget deficit target for 2008 is achievable. «Fitch’s assessment of the 2005 budget is that the 2.5 percent of GDP reduction in the deficit to 2.8 percent next year is achievable, given an almost 1.5 percent of GDP cut in investment expenditure (mostly due to the decline in Olympics-related spending). However, some overshoot is likely if the budget assumption of 3.9 percent economic growth next year is not realized. Nonetheless, even if the 2.8 percent deficit target is missed, Fitch does expect the 2005 budget to mark the first step in bringing public finances back under control. This…along with measures to improve the business environment, supports the stable outlook on Greece’s sovereign rating,» Fitch said. (Kathimerini, Reuters)