--Adds Economic Projections, Comments On Privatization, Greece Progress
By Angelika Papamiltiadou
BRUSSELS (MNI) - A long-anticipated report on Greece by the European Commission and European Central Bank -- two-thirds of the so-called Troika -- recommends that Athens should be given an additional two years, from 2014 to 2016, to achieve its fiscal objectives.
The draft report, obtained by MNI, says that the two-year extension will cost an additional E17.6 billion, though it does not provide details of how the money will be raised.
Interestingly, the report does not provide any assessment of Greece's debt sustainability, which is a key component for further decisions on Greece, including whether and when to release the delayed E31.5 billion loan tranche that Greece desperately needs. Greece's bailout program stipulates that the country is expected to reduce its debt ratio to 120% of GDP by 2020, from the just-under 190% level expected next year.
Greece's official creditors largely acknowledge that is a virtually impossible goal, and the number is likely to be closer to 150% eight years from now.
The Greek government had sought the two-year extension in order to soften the blow of austerity measures amidst a deeper-than-expected recession that will enter its sixth year in 2013.
"The two-year extension of the adjustment period will mitigate the impact on the economy, while securing a sustainable fiscal position," the report says. "Under the revised adjustment path, the primary balance targets have been set at 0%, 1.5%, 3% and 4.5% of GDP for the four-year period 2013-2016, respectively."
It adds that, "the deficit cutting measures needed to reach the revised primary balance targets amount to E9.2 billion and E13.5 billion in 2013 and 2014, respectively, in cumulative terms. The revised path for the primary balance means that the general government budget deficit would fall below 3% of GDP in 2016, two years later than originally envisaged."
The European part of the Troika warns that "the extension of the adjustment period should not be seen as a way to reduce the effort [by Greece], which would weaken the credibility of the program."
The fiscal effort undertaken to achieve the target in 2013-14 remains very large and heavily frontloaded. Even though the primary balance is only expected to improve by 1.5% of GDP, this is in itself a large change in the face of a further deepening of the economic recession.
The report highlights the fact that Greece will need additional funding even without the 2-year extension period, because of revenues shortfall from the privatization program and the recession.
The extension itself will require additional funding of E17.6 billion.
"Financing needs for the Greek sovereign have to be increased also for the period 2015-16 given the higher debt profile, but also as access to capital markets remains uncertain," the report says.
"Market access depends on many factors. Even though the perception of the overall policies and credibility of the government could improve significantly after two years of successful program implementation, it is prudent to assume that markets may remain sceptical about Greece for a longer period, given the vulnerability resulting from the high debt ratio and political risks," it continues.
"Additional financing needs for 2015-16 amount to E14.1 billion if the originally scheduled fiscal adjustment path is maintained, and to E17.6 billion if the fiscal adjustment path is extended by two years," the report adds.
The report says that the extreme uncertainty surrounding developments in Greece impacted the economy even beyond Greece, and this still affects the program going forward.
According to the economic projections in the report, the Greek economy is expected to decline for a fifth successive year in 2012 with output falling by some 6.0%, then again in 2013, when GDP is expected to contract by a further 4.3%.
The turning point of the recession is not expected until late 2013, leading to moderate GDP growth of 0.6% in 2014 followed by stronger upturns of 2.9% and 3.7%, respectively, in 2015 and 2016. The recovery is dependent upon the return of business confidence and investment, boosted by the implementation of reforms under the economic adjustment program, as well as progress with major projects co-financed by EU funds, the report says.
Overall, "the program strategy remains valid, but its focus on structural reforms to unlock growth and employment has been strengthened," the report says. It acknowledges the efforts made by the coalition government in Athens, but stresses that efforts must continue on the structural reforms front and privatization fronts.
"The privatisation plan has been disappointing so far, but has regained momentum since September 2012," the ECB and European Commission say. However, doubts about the effectiveness of the privatisation process persist, which requires setting better incentives for delivering higher proceeds while contributing to better industry practices, more investment and net job creation.
--Brussels bureau, email@example.com