Wednesday, February 3, 2010

The Risks In Greece are STILL VERY HIGH

Broad EU Political Support, But Economic Risks Remain High

•The EU Commission today published its assessment of the Greek plan to cut its deficit – from 12.7% in 2009 to 3.0% in 2012 – and to strengthen its competitiveness and growth potential through a series of structural reforms.

•The EU broadly backs the Greek government’s commitment towards fiscal consolidation by saying “the Commission shares the ambitious budget-deficit reduction targets that the Greek government has set itself as well as the fiscal measures and structural reforms announced in the stability programme. The Commission also welcomes the announcement by the Greek government, on Tuesday, of a set of additional fiscal measures (concerning the wage bill, excises on fuel and pension reform), to safeguard the budgetary targets set in the programme”. The explicit reference in the press release to the additional tightening measures announced last night by the Prime Minister – in an unexpected televised address to the nation – suggests that these extra immediate measures were a pre-requisite for winning the EU support.

•In our view, it was virtually inevitable that the EU Commission would approve the Greek government’s fiscal plans. The market consequences of a negative assessment would have been immediate and severe. The real uncertainty over the last couple of weeks has been over how credible and detailed the fiscal programme would be in terms of (1) what, if any, extra fiscal restraint measures would the Greek government announce before today to win the EU support,
and (2) what conditions for monitoring and ensuring fiscal consolidation would the EC insist on. In these terms, we believe today’s recommendations go further than many had expected, with last night’s extra fiscal measures and a fairly tough approach to conditions and fiscal surveillance

•Why was today’s approval so important? After all, many EU countries currently are running “excessive deficits” according to the European Commission, and yet do not face major market sanction. In our view, the European Commission approval was crucial in two respects. First, it buttresses the Greek government’s argument domestically that painful fiscal measures are essential and unavoidable. Second, European Commission approval keeps intact the perception among investors that – if needed – there will be a bailout or financial support of some kind for Greece from other euro area governments or via the European Commission and EU. No such commitment has been made explicitly, but the perception that a bailout or financial support will occur if needed is a crucial


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