Greece Likely to Fall Short of 2010 Deficit Reduction Goal

by: Research Recap

Oxford Economics says Greece is unlikely to achieve the target of its new program of severe fiscal austerity, aiming to cut the deficit to under 3% of GDP by 2014.

The program consists of a combination of spending cuts, primarily through a reduction in wage and pension expenditures, tax increases and structural reforms to the tax system. It is based on considerably more realistic macroeconomic assumptions than previous plans.

Nonetheless, we have a more negative view in the near term. We see GDP falling by 4.6% this year and 2.8% next, which suggests that the government will fail to reach its ambitious deficit target this year.

With much weaker real GDP growth and probable price deflation, the debt/GDP ratio will continue to worsen until 2013, peaking at almost 150% of GDP. This implies a massive burden of interest payments, even if average interest costs drop sharply from current levels, suggesting that some form of debt restructuring may be inevitable, Oxford Economics says.

OxEc Greece