• The Greek finance minister has today given the first details on the Greek stability plan, which is to be sent to the European Commission tomorrow.
  • The plan is very ambitious. Greece intends to bring the deficit down from around 13% of GDP last year to just 2.8% of GDP in 2012.
  • Good intentions are not enough. We lack details on how the deficit will be reduced. Hopefully the stability plan will include a detailed list of specific actions to be taken.
  • We are also concerned about the reliability of official data and the lack of public support for more prudent policies.
The Greek finance minister has today given the first details on the Greek stability plan, which is to be sent to the European Commission tomorrow. The Greek stability plan sees the budget deficit at 5.6% of GDP in 2011 and 2.8% of GDP in 2012. These are very ambitious targets that will demand some tough decisions. Bringing the deficit down from around 12.7% of GDP to 2.8% of GDP in just three years is an immense task and the cut in expenditures and/or increase in revenues required are obviously very substantial.

Privatisation revenues are expected to give 2.3% of GDP over the next three years. The debt should then be 113.4% of GDP in 2013 according to the Finance minister (as referenced by Reuters). We believe that the debt ratio is already at 113% of GDP – and a debt ratio just below 130% in 2013 seems to be a more realistic target. In a no change scenario we estimate that the debt would reach 155% of GDP in 2013.

High growth can help to reduce the debt-to-GDP ratio. GDP growth is expected to reach 1.5% next year and 1.9% in 2012 according to the Finance Minister. We believe it is difficult to see how this might materialise at the same time as the government is tightening the budget by 3-4% annually.

We see three major problems:
  1. Good intentions are not enough. We lack details on how the deficit will be reduced. Hopefully the stability plan, which will be sent to the EC tomorrow, will help. If the Greek Government fails to deliver a detailed list of specific actions to be taken that could convincingly bring the deficit down by the magnitude foreseen in the stability plan we fear that markets would react negatively and spreads could widen further. A convincing plan could on the other hand lead to notable spread tightening.
  2. The European Commission report on Greek government deficit and debt statistics published earlier this week said that Greek fiscal statistics (and macroeconomic statistics in general) lack quality and further revision of Greek government debt and deficit cannot be ruled out. Historically there has been a tendency for upward revision. We believe the current official figures could underestimate the size of debt.
  3. Public support for tough choices is still lacking. Luckily the Greek government is only 101 days old, so it does not need to focus much on the next election, but the implementation of the plan will be so demanding that we should expect to see strikes, etc.