C/A gap widens to 12 pct of GDP, has BoG worried

Greece’s current account gap widened to 12.1 percent of GDP last year, the highest in the eurozone, highlighting an erosion of economic competitiveness that is worrying the central bank. Data published yesterday showed the deficit reached -23.6 billion in 2006, ballooning by -9 billion from 7.9 percent of GDP in 2005. Cheap money since Greece joined the eurozone in 2001 has sparked a borrowing boom by households and even though Greece currently finances its debts without a problem, taking advantage of low eurozone interest rates, in the long run this is not sustainable, the central bank says. «To the degree that they reflect high levels of private consumption and investment in homes, or the deterioration of the economy’s price competitiveness, deficits lead to an increase in external debt,» the Bank of Greece said in its latest monetary policy report. The central bank has said that to ensure high growth rates on a sustainable basis, Greece needs to transform its -200 billion economy, with future growth hinging mainly on exports and business investment. «When you don’t have sustainable offsetting items such as foreign direct investment inflows to finance (the current account deficit), you have to borrow to cover the gap. This increases external indebtedness,» said EFG Eurobank economist Platon Monokroussos. Boost exports If the trend persists, an increasing proportion of national income would be needed to service external debt, hurting growth and living standards. «Without recourse to a devaluation, the policy mix needed is tight fiscal policy and structural reforms,» he said. «Greek exports have been rising in the last three years. Still, containing wage increases is necessary to address eroding competitiveness,» said economist Dimitris Maroulis at Alpha Bank. For this year, the Bank of Greece expects the current account gap to ease to around 11.5 percent of GDP on softer oil prices. Rising oil prices, increased private consumption and new ship purchases to renew the merchant fleet were behind the larger trade gap in 2006. «Apart from more expensive oil imports, a significant contributor to the current account deficit was the widening gap in the trade balance ex-oil, a reflection of eroding competitiveness,» Monokroussos said. Another driver was rising interest and dividend payments, reflecting rising interest rates and Greece’s position as a net debtor.