Greek Deficit to Widen to Twice EU Limit, Papathanasiou Says

By Maria Petrakis

Sept. 17 (Bloomberg) -- Greece’s budget deficit will reach twice the European Union limit this year, prompting the ruling New Democracy government to propose spending cuts and wage freezes that are hurting its popularity weeks before elections.

The economy will contract this year for the first time since 1993, and shrinking revenue will boost the deficit to 6 percent of gross domestic product, Economy and Finance Minister Ioannis Papathanasiou said in e-mailed responses to questions. That tops a previous forecast of 3.7 percent and depends on the success of one-off measures like taxing yacht owners, he said.

Prime Minister Kostas Karamanlis on Sept. 2 called elections two years early, saying he needed a new mandate to tackle mounting economic problems. He’s trailing in opinion polls by as much as 8 percentage points after pledging to freeze public-sector wages, pensions and hiring to trim the deficit. Opposition leader George Papandreou has promised more spending and higher wages to boost consumption and growth.

“Our income policy is clearly within the framework of curbing state spending,” Papathanasiou said. The government will also maintain its commitment to lower tax rates for businesses and individuals to increase competitiveness and growth, he said.

Tax Evasion

With the global recession hurting shipping and tourism, the country’s biggest industries, and unemployment rising, the government can’t count on additional revenue. Papathanasiou plans to tame spending and crack down on tax evasion to convince the EU that Greece is serious about deficit control. Greece risks sanctions by the European Commission if can’t meet a 2010 deadline to trim the deficit to within the EU’s 3 percent limit.

“Of course we will request an extension,” Papathanasiou said. “We have to be convincing that we deserve one.”

Offering voters spending cuts and wage freezes has done little to help New Democracy in opinion polls since calling the elections. The party has trailed the socialist Pasok party for more than a year but the gap has widened this month and for the first time some polls indicate Pasok could win a majority in the 300-seat parliament in the Oct. 4 vote.

New Democracy’s chances have been hurt by Greece’s stumbling economy, until last year one of the fastest growing in the European Union. GDP will see a “small contraction” this year, Papathanasiou said, revising his earlier estimates of zero growth. His latest forecast incorporates data from the summer tourism period, he said.

Debt Growing

With Europe’s second-biggest debt load after Italy and a swelling deficit, the government has had little to spend on stimulus measures to try to buffer the effect of the global slowdown. Total net borrowing was 52.5 billion euros ($77.1 billion) at the end of September, the equivalent of more than 20 percent of GDP. The country will sell another 3.5 billion euros of Treasury bills next month to cover maturing debt, he said. He wouldn’t give a target for 2010 debt sales.

“Although the situation in financial markets has improved recently, compared with the first quarter of 2009, conditions continue to be volatile,” he said. “It would be irresponsible for anyone to hazard an accurate estimate for developments in 2010. The 2010 borrowing program will have to have the necessary flexibility for us to deal with any market conditions.”

With the larger European economies and the U.S. emerging from recession, the prospects for the Greek economy “are more positive,” and the recovery will be sustained by low interest rates, he said.

Papathanasiou said he believed the European Central Bank will keep rates “at present levels for some time, given there is no inflationary pressure.” He said he didn’t see a danger of a “two-speed” recovery in the 16-nation bloc but that “the rate of growth in the Greek economy will increase at least as much as the euro-zone average.”

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net.