The Greek government may be right when it says the same economic medicine should not be given to all countries irrespective of their structural economic characteristics. However, a look at the budget figures shows the often maligned Irish prescription may be the right one at a time capital markets continue to demonstrate zero tolerance toward Greece. The government gained a respite last week, following Moody’s decision to cut the country’s medium-term credit rating by a soft one notch to A2 from A1 and attach a negative outlook. It could have been much worse for Greek bonds if Moody’s had followed the example of its two peers, namely S&P and Moody’s, and downgrade it to the B category, making it impossible for banks to raise cash in ECB operations in December 2010. The easing of Greek spreads over German bonds after the decision reflected the relief of many market participants. The passage of the 2010 budget which aims at a budget deficit of 9.1 percent of GDP compared to an estimated 12.7 percent this year wound up a busy week but it is not enough to make the markets and the EU trust the Greek figures and rightfully so. Greek politicians have only themselves to blame for this. Back in 2004, the newly elected conservative government initiated a fiscal audit whose main «innovation» was to change the accounting method by which military procurement expenditure was recorded in the budget. The revision resulted in an accounting shift of future expenditure to the past, thereby ballooning the budget deficits above 3 percent of GDP and earning Greece the stigma of cooking up the numbers to become a eurozone member. If the 2004 fiscal audit fiasco was not enough, the Greeks made another mistake in 2009, putting themselves in the corner. The initial deficit target in the 2009 budget was set at 2 percent of GDP but was revised upward to 3.7 percent in the January 2009 update of the Stability program submitted to the EU authorities. The deficit-to-GDP ratio was revised again upward to 6 percent by the previous conservative government before the October 4 general elections and ended up at a whooping 12.7 percent a month or so later after the socialists took power. The conservatives blame the new Socialist administration for ballooning the budget deficit to 12.7 percent on purpose to make it easier for themselves to bring it sharply down in 2010 and get the political credit but also making the mistake of underestimating the markets’ reaction. Independent economists say in private that the 2009 budget deficit could have been kept below 10 percent and even 9 percent of GDP if the new government had mobilized the country’s tax collection mechanism to bring in some of the budgeted revenues. In other words, the Greeks shot themselves in the foot for a second time this decade. This is now history but it has created a huge credibility problem for no real reason. Thus, one cannot rule out the possibility of Greece being forced to make an even bigger cut in its 2010 budget deficit to less than the 8.7 percent of GDP announced by the government, when it presents its updated Stability Program in January. A simple look at the trajectory of spending and revenues shows the way. The general government budget deficit stood at 4 percent of GDP in 2007 with spending accounting for 44.4 percent of GDP and revenues accounting for 40.4 percent. In 2008, the deficit widened to 7.7 percent of GDP with expenditures rising to 48.3 percent of GDP and revenues inching up to 40.6 percent. In 2009, the budget deficit ballooned to 12.7 percent of GDP with spending climbing to 50.1 percent of GDP and revenues falling to 37.3 percent of GDP. In other words, the 8.7 percentage point deterioration in the deficit between 2007 and 2009 originated from a 5.7 percent rise in expenditures and a 3.1 percentage point fall in revenues. This means the swelling of the 2009 deficit was due mainly to spending overruns rather than revenue shortfalls. So, it is normal to expect a further deficit reduction of the 2010 budget to come from the expenditure side, where the budget outcome is more certain. Of course, Finance Minister Giorgos Papaconstantinou is right when he points out that Greek budget revenues as a percentage of GDP are lower than the eurozone average by a few percentage points and tax evasion should be tackled. It is also true however that general government expenditures at 50.1 percent of GDP in 2009 are well above their historical average and the government appears to be banking on revenue increases to close the 2010 budget hole if one takes into account the non-recurring spending items of 2009. In this regard, focusing on spending cuts, like the Irish, to further reduce the budget deficit-to-GDP ratio may be warranted in order to appease the markets and be able to count on help from the EU.