Greece to miss deficit target

Greece’s budget deficit will be above target in 2011 and 2012, the Finance Ministry has warned.

To receive the next tranche of aid from the Troika (the International Monetary Fund, the European Union and the European Central Bank), Greece must reduce its budget deficit to 7.6% of gross domestic product (GDP) in 2011, a target which the debt-stricken nation has revealed it will now not make.

The Greek Finance Ministry revealed on Sunday 2 October that it now expects to report a deficit of 8.5% of GDP this year, as tough austerity measures have been coupled with a worse-than-anticipated economic contraction of 5.5%, compared with the 3.8% decline forecasted in June.

While a 5.5% contraction in 2011 GDP is in line with recent predictions by the IMF, it is significantly worse than the 0.6% growth predicted in the summer when the second €109bn bailout package was calculated.

"Three critical months remain to finish 2011, and the final estimate of 8.5% of GDP deficit can be achieved if the state mechanism and citizens respond accordingly," the Finance Ministry said in a statement.

Furthermore, while the 2012 budget deficit is expected to meet the nominal goal of €14.6bn, a deeper-than-expected recession means that the deficit will total 6.8% of GDP next year, over the target of 6.5%. The economy is expected to shrink by 2-2.5% in 2012.

Nevertheless, Bank of America Merrill Lynch said that while the country will fail to meet the troika targets, the miss is “unlikely to be severe enough for the troika to reject the next loan tranche.” Troika inspectors were in Athens on Monday discussing whether or not to allow the sixth tranche of €8bn from the first bailout.

In order to compensate for the worse-than-expected deficit, Greece has decided to implement a new €6.6bn austerity package. The new measures include placing 30,000 public sector workers on a ‘labour reserve’ scheme, who will either be laid off or given reduced pay.

"It creates the lowest possible social cost and places on a ‘reserve’ those who in comparison can more likely cope with the difficulties of this new situation," said finance minister Evangelos Venizelos.

According to German newspaper Welt am Sonntag, Austria’s finance minister Maria Fekter said that the Greece’s next tranche of aid is likely to be given: "The likelihood that the next…slice of aid will be paid out…is, in my view, clearly higher than the likelihood it will not be paid.”

"It should not be the case that the payment of individual tranches of aid become a battle every three months because Greece threatens to fall short of the conditions," she said.