Bank of Greece sees GDP growth at 3.5 pct in 2006

The Bank of Greece yesterday forecast that gross domestic product growth will reach 3.5 percent in 2006, against a government budget forecast of 3.8 percent. But while Greek GDP growth is above the average for the eurozone as a whole, it is not helping the country as a whole, Bank of Greece Governor Nicholas Garganas said while presenting the central bank’s interim monetary policy report on the Greek economy. The benefits of the growth «are not nationwide nor are they sector-wide,» Garganas said. «There are categories of Greek citizens who are not participating in the economic growth,» he said, adding that about a quarter of Greeks live in poverty. «Nor has unemployment been significantly reduced despite the high growth rates,» he continued. The government is targeting an unemployment rate of 9.8 percent in 2006, down from an estimated 10.4 percent in 2005 and 11 percent in 2004. Garganas, who is also a member of the European Central Bank’s Governing Council, said the ECB is closely monitoring price risks in the eurozone but has not yet decided on a series of interest increases in the short term. «Excess liquidity in the eurozone is still a danger for price stability,» he said. This indicates that inflation risks have increased over the medium term, he added. Warning to borrowers The ECB is widely expected to raise interest rates by another quarter point to 2.5 percent next week. Greece’s chief banker said the latest estimates see eurozone average inflation in 2006 ranging between 1.6 percent and 2.6 percent. The Greek central bank forecasts average inflation in Greece for 2006 of 3.3 percent, compared with a government target of 3.2 percent. Garganas warned borrowers of the dangers posed by the prospect of rising interest rates, advising that they prefer fixed-rate loans in order to avoid the dangers posed by fluctuating rates. He noted that the percentage of consumer loans falling behind in repayments rose to 8.8 percent of total balances in September 2005 from 7.2 percent at the end of 2004. He also said that 95 percent of mortgage loans, which total 43.1 billion euros, are at variable rates, although the percentage of such loans with overdue repayments had remained steady at 4.6 percent over the same period. House prices rose 10.4 percent in the first half of 2005, year on year, which contributed to increased demand for mortgage loans (31.3 percent in the fourth quarter of last year). The outstanding total of both consumer and mortgage loans amounted to 3.7 billion euros and commercial banks have formed increased provisions against likely losses, Garganas said. He said he has urged banks to apply conservative criteria when evaluating loan applications. The central bank has recommended that the amount of monthly loan repayments should not exceed 30-40 percent of borrowers’ monthly incomes. It is also instructing banks to ensure that mortgage loans do not exceed 75 percent of the commercial value of properties bought. Garganas said that although the spread between deposit and lending rates in Greece fell by 27 basis points in 2005, it remained among the largest in Europe. «Competition will contribute to the narrowing of the spreads, which signify the high operating costs of Greek credit institutions,» he said. Total household credit in Greece at the end of 2005 represented 38.8 percent of gross domestic product, against a European Union average of 52.6 percent. Overall, Garganas said, the Greek banking system is sound and may be considered capable of withstanding possible upheavals. (Kathimerini, AP)

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