Need to Elevate Market Credibility - The Best from Greece

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Posted on: 29/Oct/2009

Finance Minister Giorgos Papaconstantinou addresses the press following an EU finance ministers’ meeting in Luxembourg. In his first appearance as head of Greece’s finances, he faced harsh criticism from his EU peers.

Recently appointed Finance Minister Giorgos Papaconstantinou was given a public dressing-down in Luxembourg yesterday over the credibility of Greece's deficit data after he more than tripled the estimated budget shortfall for the year.

At his first meeting of Eurogroup ministers, Papaconstantinou pledged to bring the budget deficit into single digits in 2010 from this year's expected 12.5 percent, more than three times Greece's previous 3.7 percent forecast.

«We plan to start consolidation [of public finances] in 2010; they will be structural, not one-off measures,» Papaconstantinou told a news conference.

«We plan a new law by February next year, it will change the fundamental mechanics in the tax collection system, which has unfortunately collapsed in the last few months,» he added.

Budget deficits have swollen everywhere in Europe as the economic crisis prompted an increase in stimulus spending.

But nowhere has the scale of change been as big as in Greece, a chronic offender of the eurozone's budget deficit rules, which recently doubled its 2009 budget deficit forecast, triggering harsh criticism from fellow EU partners.

«The game is over - we need serious statistics,» Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, said late on Monday. Papaconstantinou pledged to improve the quality of statistical reporting by boosting the national agency's independence and distancing it from policymakers.

With economic contraction expected at 1.5 percent in Greece this year, Papaconstantinou said the government's borrowing needs may be slightly higher than the 62-63 billion euros expected so far.

«There will be a need for additional borrowing; we will be very careful,» he said.

Athens wants to negotiate a three-year period of grace with the European Union to get its deficit back to the 3 percent of gross domestic product limit prescribed under the bloc's economic policy beacon, its so-called Stability and Growth Pact.

«It is clear the previous target of bringing the deficit below 3 percent by 2010 is quite out of the question,» Papaconstantinou said.

A «three- to four-year horizon is a realistic goal, with four more likely than three.»

Need to elevate market credibility

The government should implement a plan to cut its budget deficit by around 5 percent of gross domestic product by the end of 2011 to aid growth and enhance its credibility in financial markets, the Bank of Greece said yesterday.

«It is of the essence that Greece sends to markets the message that it remains committed to the medium-term goal of a strong fiscal position,» said the semi-annual report.

«This will bolster the country's credibility in international markets and create positive prospects.»

The central bank expects the economy to shrink by 1 percent this year, the first contraction since 1993. Unemployment will exceed 9 percent and the year will end with an inflation rate of between 1.1 percent and 1.3 percent.

Fighting tax evasion and government waste should be part of the campaign to cut the shortfall, the central bank added.

«Combating waste and tax evasion gradually over 10 years would mean a fiscal benefit of the order of 3 to 5 billion euros, or 1.2 percent to 2.2 percent of GDP annually,» the report said.



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