While Finance Minister Giorgos Papaconstantinou appears confident Greece will meet or even exceed the 2010 budget deficit target of 8.1 percent of gross domestic product agreed in the economic policy program with the European Commission, the European Central Bank and the International Monetary Fund, executives from the private sector appear more pessimistic about the prospects of their firms and the real economy. This, in turn, poses a dilemma: Can Greece stick to the austerity program and slash its budget deficit as planned or will the burden of a badly bruised private sector undermine this effort? There is no doubt that the country’s fiscal consolidation is unprecedented even by international standards. The general government budget deficit will have to be reduced by some 11 percentage points of GDP between 2010 and 2013, half of which is planned to be slashed this year. But the government, which let the country get to this point, has no other way but to cut its budget deficit and satisfy the terms of the memorandum if it wants to secure the remaining 10 loan disbursements from the 110-billion-euro financing package provided by eurozone countries and the IMF. It is noted 80 billion euros come from the eurozone and the rest from the IMF. At this point, the budget appears to be on track to meet the deficit goal of 8.1 percent of GDP. This is despite a noticeable miss in tax revenues, which some analysts and businesspeople think will grow as we approach year-end. This may reflect more over-taxation along with poor Greek data and accompanied estimates of tax elasticities in setting the initial revenue target in the memorandum. It may also reflect the political will of the government to show that deficit reduction will come almost equally from both the expenditure and the revenue side, rather than being skewed toward expenditure cutting. Even so, expenditure cuts, including a moratorium of payments to the state’s various domestic creditors, and a better-than-estimated performance of nominal GDP will likely ensure the attainment of the 2010 deficit reduction target and may even meet the revised target of 7.8 percent of GDP. Only a sharp upward revision of last year’s budget deficit in excess of 14 percent of GDP and a collapse in tax revenues could put the above official projections at risk. Government officials and even members of the so-called troika are likely to agree, the latter with more caution, to the projected path of the budget deficit. But the majority of bankers, especially credit managers, businesspeople and others appear to be much more pessimistic about the prospects of the Greek economy until next May, to say the least. Some even doubt whether the improvement in fiscal data can last as sectors and individual firms are squeezed, sometimes to death. From the more pessimistic senior bankers in charge of credit who say «we are finished, no none of the borrowers are paying,» to the less pessimistic who are deeply worried, the specter of a vicious cycle is real. According to them, the state may reduce the budget deficit but this comes at the expense of the private sector. By overtaxing on one hand and refusing to pay for the money owed on the other, the state strangles the private sector, they claim, prompting some hot-heads to demand that 200,000 public sector employees be laid off to save 400,000 productive jobs in the private sector, as one of them put it in an e-mail. Bankers and businesspeople are concerned economic conditions are bound to deteriorate in the months ahead, necessitating more austerity measures, which in turn put more pressure on the real economy and so on, finally eroding social support for the economic policy program. Especially, senior credit managers at medium-size and large banks describe a bleak situation on a daily basis, as they find out more and more of their clients are either closing down or say they are unable to pay their installments which, in many cases, had already being rescheduled before. This environment contrasts with the more optimistic one painted by aggregate numbers, even for employment, and makes many wonder whether this deterioration will catch up with fiscal developments and if so, when. Undoubtedly, it is not easy to reconcile this bleak picture of the real economy with the projected path of the budget deficit. If they are right in their outlook and something does not happen to change the dented psychology, one will have to expect a dramatic drop in the so-called «flow» tax revenues in the months and quarters ahead. This will definitely put the implementation of the budget at risk and will likely lead to the imposition of new austerity measures. What can change all this? A sharp pick-up in exports may help but it is not enough when jobs are lost and incomes are hurt in the private sector. A jump in investment spending does not look likely either. So, the next hope is a pick-up in tourism – but this will have to wait until next May-June. All-in-all, it looks probable that the two opposite sides in this equation will have to meet at some point late this year or in the first quarter of 2011. It is then we will know which side erred and how major the error was.