Borrowing target allows for fiscal shortfall, one-off items

The sharp economic downturn has exposed the limited improvement in Greek public finances over the last few years. This has brought the country’s borrowing requirements and huge public debt to the forefront of public discussion with the ruling conservatives and the main Socialist opposition party battling it out ahead of the elections for the European Parliament in June. Undoubtedly, Economy and Finance Minister Yiannis Papathanassiou poured oil on the fire by recently admitting that the country will borrow 50 billion euros this year, up from some 43 billion sought in the budget. Papathanassiou said the extra 8 billion euros will serve as a cushion in case international market conditions deteriorate in the months ahead. However, most analysts and commentators interpreted the statement as an indication of the government’s inability to trim the budget deficit to 4 percent of GDP or lower this year from an upwardly adjusted 5 percent of GDP in 2008. Leaks in the local media about budget expenditure overruns and tax revenue shortfalls in the first quarter have reinforced this impression along with forecasts of zero or even negative GDP growth rates this year. It should be noted that the government has yet to revise downward its official estimate of 1.1 percent GDP growth this year. These concerns may be justifiable but Greece has borrowed some 47 billion euros in bonds and T-bills or about 42 billion net excluding T-bills between January and April. In other words, the amount borrowed is not that far from the figure of 50 billion euros mentioned by Papathanassiou and, judging from the strong demand for Greek debt paper in the last issue of three-year bonds where bids exceeded the 14-billion-euro mark, the country would have no problem raising the money it wants. However, the main opposition Socialist party has said the country will need to borrow some 60 billion euros this year while others put the total borrowing requirement at 70 billion, a huge amount by any standards. Assuming the economy stagnates and the general government budget deficit ends at around 4.5 percent of GDP this year, economists estimate the gap at around 11.5 billion euros. Given the fact that the country has to refinance some 30 billion euros of maturing bonds and T-bills, this raises the total amount to some 41.5 billion. If one adds some 3.3 billion euros in extra financing sought in the budget, the total goes up to around 45 billion euros. Even if the budget deficit ends up at 6 percent of GDP, which is rather unlikely after Greece has been put under EU surveillance, the financing requirement would have been around 14.5 billion euros this year with the economy stagnant. Even so, the country’s borrowing requirements would have been about 48 billion euros. Of course, Greece is also known to have regular deficit-increasing one-offs. It is also expected to finance the suppliers of drugs, medical equipment and other items to deficit-ridden public hospitals. The latter owe some 4-5 billion euros to their suppliers, with debts sometime stretching back more than a year or two. In addition, the state owes money to construction companies, which some put at 3.0 billion euros, for works already performed. It would have been a surprise to see the state paying the companies that supply public hospitals and construction companies all the money in advance. If it did, it would have to borrow an additional 7-8 billion euros, which would have put the country’s total gross borrowing at 55-56 billion euros this year. However, this is unlikely to happen, even though this cash injection would have helped some of these companies cope with their liquidity problems. It is more likely that the state will pay some money up front, perhaps 2-3 billion euros in total, and reach an agreement with state-controlled banks so that the latter pay the balance to the relevant companies. The banks will most likely be compensated by the state over a period of a few years. Under the pessimist scenario of zero or slightly negative growth and a budget deficit equal to 6 percent of GDP and nonrecurring items reaching 6.3 billion euros in total, the country will have to raise around 48 billion euros in 2009. This is pretty close to the 50-billion-euro figure provided by the finance minister even though it eats up the «cushion of security» against adverse international market conditions. All-in-all, the new target for public borrowing of 50 billion euros appears mostly to reflect all known components of Greek debt maturities this year, a large budget deficit and sizable nonrecurring items. The extra 8 billion euros may not be a cushion against a deterioration in the international market but it certainly looks big enough to take care of the likely fiscal slippage and expenditure for the one-off items Greece is known for.