S&P’s favors faster progress

The Greek government continues to adhere to a program of gradual fiscal consolidation, having reduced the general government deficit to below 3.0 percent of GDP in 2006, but this consolidation will be unsustainable over the longer term without increased focus on social security and public administration reform, Standard & Poor’s (S&P’s) Ratings Services said on Friday. «The majority of the fiscal adjustment since 2005 have come through a reduction in capital expenditure, nonrecurring items, and savings related to debt servicing. General government debt is expected to reach about 100 percent of GDP in 2007, down from the 112 percent prevailing on the eve of EMU entry in 2000. «These modest improvements in the public finances have come about notwithstanding the fact that the Greek economy has nominally expanded at an annual average of 8 percent since 2000, with average real growth of more than 4 percent per year, double the rate of growth in the eurozone,» S&P’s noted in a report. «The pace of reform has also been slow given the government’s comfortable majority. Moreover, the environment for medium-term fiscal consolidation will be challenging because the economy is operating above its long-term growth potential. Furthermore, interest savings will become negligible and might even reverse given the rise in historically low interest rates and the refinancing risk associated with the high rollover ratio of Greek debt, estimated at 12 percent of GDP in 2007.» The sizable current account deficit, which rose to about 12 percent of GDP in 2006, indicates that a moderation of domestic demand is likely, undermining the government’s revenue base. Nevertheless, the ratings continue to be supported by relatively high economic prosperity and membership of EMU, which effectively shields Greece from potential pressures related to the balance of payments. Recent attempts to improve the quality of Greece’s financial data, to increase surveillance of public sector entities and reform procurement practices are expected to put an end to the significant upward revisions of the general government deficit and debt ratios experienced over recent years. The stable outlook balances the pressure on Greek public finances against the assessment by S&P’s that the public debt ratio will decline modestly in the medium term. Economic convergence with higher rated sovereigns should be maintained. A failure of the general government debt ratio to decline gradually from current levels over the medium term would bring the ratings on Greece under renewed downward pressure. The ratings could be raised, however, if structural budgetary improvements were to lead to a clearly discernible trend toward general government balance, in combination with a decrease in the public debt ratio as projected in the government’s December 2006 Stability and Growth Program. S&P’s expects that following the 2008 general election, the next government will implement pension reform. Although the introduction of measures that significantly improve the sustainability of the Greek social security system would strengthen the ratings, they will remain constrained by the significant increase in aging-related public spending expected in the coming decades.