Greece

Greece makes progress on deficit

Greece has made “considerable progress” in dealing with its financial crisis, according to the latest assessment from European Union and International Monetary Fund inspectors, but all is still not well in the Mediterranean country.

Following a two-week review of Greece's austerity programme, officials concluded on 5 August that Athens’s austerity programme has made “a strong start”.

Greece, which has the second-biggest budget gap in the European Union, is now likely to receive a €9bn instalment of emergency loans by 13 September as part of the three-year, €110bn rescue package set up by the EU and IMF.

While the country’s efforts to cut its budget deficit to 8.1% of GDP this year, from 13.6% in 2009, and to 3% by 2012 have been welcomed by its international lenders, the Greek people are still struggling with the impact the austerity measures are having on their day-to-day life.

Steep salary cuts and rising taxes in the face of a brutal economic downturn have meant widespread strikes, while demonstrations, often resulting in violent clashes between protesters and riot police, have become an almost daily occurrence on the streets of Athens.

A crippling six day walk-out by truckers caused fuel shortages across the country at the height of the busy holiday season, affecting tourists as much as harvests, imports and exports.

Greek tourism, which generates about 18% of the country’s national output, has already been damaged by six general and several sector strikes this year.

Investors also remain cautious. The spread on Greek government bonds was largely unchanged, though it remains below the record 965 basis points seen early in May.

The spread is the difference between rates of interest on a Greek ten-year bond and the benchmark German ten–year bond. A bigger spread indicates more risk to investors.

Jeremy Batstone-Carr, an analyst at stockbroker Charles Stanley, said investors should note that Greece’s public debt is still expected to stand at around 150% of the country’s GDP by the end of the austerity programme even if all fiscal targets are met.

“On this basis we would not to expect much narrowing in Greek bond spreads as investors continue to weigh up the probability of default / restructuring possibly even before the austerity programme ends,” Batstone-Carr added.

Greece's mounting fiscal woes have become the toughest test for the eurozone. The rot started late last year when Greece revealed that the country’s budget deficit was more than twice as big as previously thought.

Prime Minister George Papandreou was forced to announce deep spending cuts, a freeze on public sector wages, pension reforms and increases in fuel taxes to slash the deficit below 3% of GDP by the end of 2012.

Attention subsequently swung to the other southern Europe economies, known as ‘PIIGS’ (Portugal, Italy, Ireland, Greece and Spain), causing a sovereign debt crisis rattling the single euro currency and stock markets across the region.