C/A gap expands to 14 pct of GDP

Greece’s current account gap ballooned last year to 14.1 percent of gross domestic product, exceeding economists’ expectations and threatening long-term growth and jobs. Data released by the Bank of Greece yesterday showed the country’s current account deficit widened by -8.6 billion or 36 percent reaching -32.3 billion ($47.10 billion) in the 12-month period. The deterioration was mainly the result of higher trade and income account gaps and a lower transfers surplus. In 2006 the current account deficit amounted to 11.1 percent of GDP. Greece’s economy, representing about 2.5 percent of the eurozone, has been expanding faster than its euro partners, boosting demand for imports, while an inadequate domestic savings base to finance consumption has resulted in increased foreign borrowing. «The current account deficit topped expectations, we were projecting a gap of around 13.4 percent based on revised GDP figures,» said EFG Eurobank economist Platon Monokroussos. «The sharp widening is due mainly to a higher-than-expected oil import bill and net payments for the import of ships.» The deteriorating trend in Greece’s current account balance reflects underlying structural woes as well as cyclical factors, economists say. Although eurozone membership shields the country from currency devaluation pressures, more worryingly, the worsening current account balance reflects eroding economic competitiveness. This is due to higher inflation and unit labor costs versus its main trading partners. «From a financing point of view the current account gap may be irrelevant in the short term, given Greece’s eurozone member status. But it may pose a threat to the country’s growth outlook in the medium term,» Monokroussos said. Greece is increasingly becoming a debtor nation – net private and public sector debt owed abroad grew to 92.2 percent of GDP in 2006 from 51 percent in 2001. Credit expansion is running strongly and banks are funding abroad. Bank of Greece Governor Nicholas Garganas has warned that the deficit, coupled with an inflation rate persistently higher than the eurozone average, threatens to hurt jobs and growth. To reverse the trend, the central bank says Greece needs to change its economic growth model to one based more on exports and less on domestic consumption. To do this it must address macroeconomic imbalances. These include further improvement in public finances, lower inflation to improve price competitiveness, a higher savings rate and structural reforms in labor and product markets, the education system and in public administration. (Reuters)