Fatigue a threat to regaining stability as effort to get Greece back on track persists

Greece may be able to meet this year’s ambitious budget deficit target. However, the biggest risk in making the grade and ultimately arresting the adverse public debt dynamics in the next few years may turn out to be something else. Fatigue among both consumers and revenues in 2011. The Greek economy continues to slide deeper into recession with the private sector feeling the pinch more and more as sales fall due to people losing their jobs or seeing their incomes get squeezed. This is to be expected in a recession but it is something unusual for a country which experienced a long period of high economic growth rates from 1993 through 2008. The fact that the private sector, which is the most dynamic and most productive in the Greek economy, faces such problems makes many economists and others wonder about the depth and the duration of the current recession. It is reminded the economy contracted by 2.0 percent in real terms in 2009 and is projected to shrink by 4.0 percent this year in the agreement signed with the European Union, the International Monetary Fund and the European Central Bank. This is so because a segment of the private sector is essentially an extension of the public sector in the sense that it depends a lot on orders from the state or state-owned entities to operate and be profitable. The semi-private sector companies are having a harder time at present because the state is forced to cut expenditures to meet the budget deficit goal. However, things are also getting tougher for the purely private sector. Access to bank credit has become more difficult and more expensive as the public debt crisis has basically shut down wholesale and non-collateralized interbank funding to Greek banks at a time when deposits are falling. The state has also made their life more difficult by not being diligent in returning VAT to some of them on time. In addition, it has hit them with new extraordinary taxes, reportedly forcing some to give thought to moving their headquarters out of Greece. The fact that a relatively limited number of Greek companies realize a sizable portion of their revenues and earnings from foreign operations or rely heavily on exports is also bad news for the local economy and the private sector in general at a time when the world economy is projected to grow faster. It is known that a big chunk of the private companies rely on domestic sales to grow but the latter are not expected to recover before the second half of 2011 at the earliest. With the private sector being squeezed and the ailing public sector in the intensive-care unit of the IMF, EU and ECB, one justifiably wonders about the stamina of the general public. That doesn’t mean that everything is going in the wrong direction. One may still wonder whether Greece will be able to cut its public budget deficit to 8.1 percent of gross domestic product from an estimated 13.6 percent in 2009 despite early positive data for the first five months of the year since the public investment budget has been slashed to accommodate spending targets and many VAT returns to businesses are late. It is also doubtful whether data from various sources such as local governments and social security funds will be in line with the budget deficit reduction goal. However, there are indeed some encouraging signs from the nominal GDP front which is used to calculate the budget and public debt-to-GDP ratio. The nominal GDP incorporates both the real GDP growth rate and the inflation rate. At this point, there are reasons to believe the nominal GDP will not shrink by 2.8 percent, as projected in the program agreed with the IMF, the EU and the ECB. According to most accounts, the GDP deflator will end up at more than 3.0 and perhaps 3.5 percent in 2010, helping push nominal GDP growth to flat or slightly positive territory. This means Greece will have either some leeway to meet the budget deficit goal if things go astray or exceed expectations if everything goes according to plan. Of course, this is a positive development but does not mean it will boost consumer, business and investment sentiment to the point of overcoming the reality of higher unemployment and a decrease in disposable income as time goes by. This is exactly where the risk of fatigue comes in. Greece may be able to meet or even surpass the budget deficit goal in 2010 but may be unable to march forward next year as more and more people get tired of the effort and stop being silently supportive. This may be more evident in the private rather than the public sector where there is lifetime employment. Of course, fatigue will show up in tax revenues as well. Still, the biggest risk will be for the majority of the people, especially in the private sector, to stop being supportive and start causing disruption to the whole process via social or political channels.