Twin deficits threaten medium-term macroeconomic stability

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Authors: G. Hardouvelis, P. Monokroussos, T. Stamatiou
Publication: Greece Macro Monitor, Eurobank Research, November 2009

Key points:

  • The Greek economy weakened significantly in the first half of this year, with the most recent readings in a number of real activity and sentiment indicators pointing to some stabilization, though no quick turnaround in domestic economic activity
  • Given the ongoing weakness in domestic demand we have revised downwards our real GDP growth forecast for 2009 to -1.3% from -1.0% GDP seen earlier and we now expect the economy to remain weak throughout next year. Real GDP growth expected to decline by a further 0.5% YoY in 2010
  • In our view, a return to strong and sustainable growth rates requires a transition of the Greek economy towards a more exports-oriented (and less consumption-dependent) model of development. To this end, structural reforms are needed to reclaim steep competitiveness loses incurred in recent years
  • On the fiscal front, the 2009 general government budget deficit risks exceeding 13.0%-of-GDP on collapsing revenue and sizeable expenditure overruns. Furthermore, the debt ratio is likely to approach 115%-of-GDP this year, with a further 8-10ppts-of-GDP rise expected in 2010
  •  More worryingly, without bold corrective measures, the debt ratio could undertake a further explosive rise in the next 3 -4years
  • In view of these developments, the 2010 budget will include corrective measures, which will reportedly aim to reduce the deficit to 9.0%-9.5%-of-GDP in 2010. The new government is also expected to ask for a 3-4 year reprieve to correct its excessive deficit. In return for its acquiescence, the European Commission is likely to ask Greece to take measures of more permanent nature to reduce its deficits

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