MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: PASOK 65% (60%)
Five-Year: PASOK 45%

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
 

Turmoil

Financial Transfer Direct Investment Export Market
18-Month: Moderate C+ A- B (B+)
Five-Year: Low B-(B) B B-
( ) Indicates change in rating. *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
 

Years

Real GDP Growth %  

Inflation %

Current Account ($bn)
2005-2009(AVG) 2.2 3.0 -35.91
2010(F) -4.3 4.7 -32.30
2011-2015(F) 0.2 1.1 -15.30

Vote of Confidence

The governing center-left PASOK more than held its own at local elections on November 7, winning eight of 13 races for regional governor and securing the mayor’s office in both the capital, Athens, and Thessaloniki, the country’s second largest city, for the first time in more than two decades…

The main opposition ND party framed the November elections as a referendum on a bailout deal with the IMF and the EU that has required Prime Minister George Papandreou’s government to impose harsh austerity measures that have provoked at times violent protests. The PASOK leader accepted his opponents’ challenge, declaring that he would call for a snap general election if the local polls produced evidence that the public had lost faith in his leadership…

The result is an important vote of confidence that will strengthen PASOK’s resolve and unity as it pushes ahead with the austerity measures and structural reforms that will be required to restore fiscal order. However, the very low turnout for the second round of voting on November 14 suggests that the electorate is only grudgingly giving Papandreou and his party the benefit of the doubt. While they have resigned themselves to the necessity of austerity, they expect their sacrifices to produce results…

A general election is not required until October 2013, by which time voters will have a good idea whether there is light at the end of the austerity tunnel or just more economic insecurity and hardship. The challenge for PASOK is to get the job done, and ensure that the pain of austerity is spread equitably. Failure on either count could cost the party dearly…

Fiscal Constraints Will Weigh on Growth

Under the bailout agreement reached back in May, the fiscal deficit was to have been reduced to 8% of GDP this year (from 15.4% of GDP in 2009). Although the revised target of 9.4% represents an impressive achievement just the same, the larger projected deficit, together with an upward revision of the deficit for 2009, points to a rise in the public-sector debt to 144% of GDP this year…

Against the backdrop of a worsening near-term debt picture, skeptics have warned that harsh austerity measures will undermine economic growth, resulting in revenue shortfalls that will make it impossible for the government to begin repaying the emergency loans in 2013. Indeed, there is a strong possibility that even harsher measures that put a further dent in consumer and business confidence are in the offing, and the once unthinkable option of restructuring of the public debt may become unavoidable if the debt crisis spreads to Portugal, Spain, and Italy…

Even if the worst-case scenario is avoided, the increased potential for such an outcome will adversely affect market sentiment, contributing to an erosion of confidence that will weigh on the economy in 2011. Taking these factors into consideration, the economy is forecast to shrink by 4.3% this year, and to contract by at least 3.5% in 2011, with significant downside risks to the forecast present next year…

Any chance of significantly offsetting the growth-stunting effect of austerity will require aggressive steps to address serious competitiveness issues. Toward that end, the Parliament approved labor-market reforms will enable employers to more easily discharge workers and reduce wages below the levels established in collective agreements. The unions have vowed to fight the reforms, pointing to the potential for eruptions of unrest that could negatively affect the business climate in the near term…

Although positive growth of 2% or slightly higher is possible by the end of the forecast period, average annual growth for the five-year period to 2015 will be just 0.2%. Constraints on fiscal expansion, persistent weak domestic demand, a strengthening euro, and the conservative monetary stance of the ECB will help to keep inflation in check over the medium term. The consumer price index will rise by an average of 1.1% per year through 2015, and periods of deflation are quite possible.

Economic Forecasts for the Three Alternative Regimes

PASOK ND National Unity
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2010 -4.3 4.7 -32.30 -5.0 5.1 -26.80 -5.3 4.5 -25.10
2011-2015 0.2 1.1 -15.30 -1.0 0.8 -7.80 0.4 1.3 -12.40