Athens in for rough ride over budgetary policy

Date: 30/05/1996

By Tim Jones

THE new technocratic government in Greece is likely to get a rougher ride from EU colleagues for its conduct on budgetary policy than that meted out to Andreas Papandreou last year.

In 1995, Athens received a letter of commendation from the EU's monetary committee for its fiscal progress following the annual assessment required under the terms of a 2.2-billion-ecu EU loan to Greece in 1991.

Eight months later and the committee, which met this week, began this year's assessment against a background of accelerating inflation and a loosening of the public-sector purse-strings.

“The execution of the budget looks shaky this year,” says Miranda Xafa, economist at investment bank Salomon Brothers. “It will be very difficult for the government do anything in the first half because there is a Socialist party congress at the beginning of July, so they won't be able to cut spending or raise revenue.”

On the surface, the Commission's forecasts for Greece will be positive. The budget deficit, measured as the 'general government' deficit, will narrow to 8.1&percent; of gross domestic product in 1996 from 9.2&percent; last year, while the debt-to-GDP ratio will stabilise at about 111.5&percent; of GDP.

However, say EU monetary officials, this masks worrying trends.

Even before Costas Simitis took over from Andreas Papandreou as prime minister, the government's budgetary targets had become less ambitious - and even these are unlikely to be met.

While the administration had targeted a deficit for central government last year of 9.8&percent; of GDP, it turned out to be 10.6&percent;. Only a surplus in the pension funds ensured that the overall deficit was kept at 9.2&percent; of GDP. This year, the central deficit is budgeted for 8.7&percent; of GDP, but could touch 9.7&percent;.

A major problem in 1996 will be the level of interest rates the government will be expected to pay investors to hold its debt. Since inflation has started to creep up this year - rising every month since January to 9.2&percent; - interest rates are unlikely to get below 11&percent; by the end of the year, remaining well above the government's expected rate of 10&percent;.

Even when the interest rate problem is removed, difficulties remain. The government's primary surplus, once interest repayments on old debt are stripped out, is also set to under-perform. Last year, the surplus was 2.3&percent; of GDP, down from the government's 3.4&percent; target.

Spending overruns and a shortfall in revenues will all undermine Simitis' policy objectives, and this will not be helped by the loosening of his public-sector incomes policy.

The policy still stands - allowing a 2.5&percent; pay increase in January and another 2.5&percent; in July - but his government responded to civil service complaints by allowing 'productivity bonuses' from March.

These were allocated to certain ministries - starting with the Ministry of National Economy and the Ministry of the Presidency - but protests from other parts of the administration look set to spread these so-called selective pay increases right across the public sector.

“Committee members are sceptical about this for obvious reasons, but also because it reduces the transparency of the Greek budget,” said an EU official.

They are also sceptical about the swollen public sector. In 1995, the public-sector payroll increased by a net 4,000.

Athens has no interest in drawing on the EU loan, but will want the same stamp of approval it received last year. On current performance, it looks unlikely to receive it.