Greece's budget crisis - Papandreou tries to prop up the pillars

Dec 17th 2009 ATHENSFrom The Economist print edition
The prime minister’s promises of fiscal austerity have not convinced the markets
Reuters

SUCCESSIVE Greek governments have managed to hoodwink the European Union over the size of the country’s budget deficit and its public debt by blaming their predecessors and then promising to do better. No longer. The European Commission’s fury over a leap in the projected deficit for 2009 from 6.7% of GDP (the figure from the old centre-right New Democracy-led lot) to 12.7% (the figure produced by the new centre-left Pasok government) helped to trigger a collapse in the Greek bond markets and even provoke dire warnings that the country might go bust.
For now, the idea of Greece having to seek a bail-out from its euro-area partners or appealing to the IMF for help is just talk. The finance minister, George Papaconstantinou, says he has had no such negotiations with his European colleagues. He adds that no euro-area government could ever go to the fund. But the markets’ grim mood could yet change things.
Since Pasok came to power only ten weeks ago, the cost of raising new two-year debt has risen by 1.35 percentage points. Meanwhile, its stock of debt will rise to 125% of GDP next year, from 113% this year. On December 15th Greece resorted to a €2 billion ($2.8 billion) private placement of five-year floating-rate notes with local banks because public-debt managers feared that investors would have shunned a fixed-rate offering.
Greece’s white-knuckle ride in the financial markets will continue. It needs to raise about €55 billion in 2010 to refinance existing debt and keep paying salaries and pensions, and most of that is front-loaded into the first six months. Indeed, the government plans to raise 40% of it in the first four months, whatever the cost—which to some observers smacks of desperation. Talk of default is dismissed as alarmist by the finance ministry. But bankers are less sanguine. “The markets will give the government two more months to turn things around, no more,” says one.
The government’s dithering (慌亂;緊張) is one reason why Greece has come under such fierce attack in the markets. George Papandreou, the new prime minister, was reluctant to abandon his campaign promises of real wage rises and extra welfare spending, even after Jean-Claude Trichet, president of the European Central Bank, visited Athens to call for “courageous measures”—code for cutting public-sector pay, as Ireland has done. At an EU summit on December 10th Mr Papandreou shocked his colleagues by admitting that Greece was riddled with corruption, which he claimed was the main reason for its economic woes. Cynical Greeks concluded that Mr Papandreou was trying to use the issue of corruption, “as central a part of Greece as the Acropolis”, says one, to build consensus for unpopular reforms.
On December 14th Mr Papandreou tried a little harder. He announced a pay freeze for civil servants earning more than €2,000 a month and a 10% cut in allowances. This is harsher than it looks because allowances an extra 60-90% to basic salaries, and because they will in future be taxed in the 40% band, not the 10% one as now. A near-freeze on public-sector recruitment and military spending, a 10% cut in operating budgets and tax rises for wealthy Greeks are all meant to bring the deficit down to 8.7% of GDP next year. Mr Papandreou insisted that Greece would cut its deficit below the euro area’s approved ceiling of 3% of GDP (a target that, even by its own dodgy numbers, the country has met just once since joining the euro in 2001) by 2013.
Sceptics were unconvinced. Standard & Poor’s, a rating agency, reacted by downgrading Greece only a week after Fitch, another agency, had done so. The downgrade came just as Mr Papaconstantinou was wrapping up a roadshow around European capitals that was meant to restore Greece’s credibility. (He seems confident that the third agency, Moody’s, will not downgrade Greece so swiftly.)
Mr Papaconstantinou, a British-trained economist, has a grip of the numbers and knows what has to be done. He is proud of his plans to establish the statistical office as an independent agency, as a way of regaining lost credibility. But he has struggled to win Mr Papandreou’s confidence and he may not keep it. Louka Katseli, the development minister, thinks Greece should borrow and spend its way back to growth, with generous handouts to low-income families. She appeals to Mr Papandreou’s idealistic side, and also goes down well with tax-and-spend socialists who recall Mr Papandreou’s father, Andreas, as prime minister in the 1980s.
It does not help that Pasok’s return to power has been so chaotic. Senior civil-service jobs were advertised online in a bid to boost transparency but, because of a lack of suitable applicants, the government fell back on the familiar habit of appointing party loyalists. Even so, many administrative posts are still unfilled, including that of economic adviser to the prime minister. Mr Papandreou, who chose to be his own foreign minister and also decided to retain the job of president of the Socialist International, prefers the diplomatic stage to the tedious business of putting the public finances in order.
There is much to do on the foreign front, too. Greece’s friendship with Turkey, neglected under the previous government, needs tending. It has frayed recently over Turkey’s reluctance to stop large numbers of Central Asian and Middle Eastern migrants crossing from its Aegean coast to the Greek islands—despite the EU’s Frontex team of helicopters and patrol boats keeping watch on illegal immigration. Greece also needs to patch up ties with America, strained by a veto, which Mr Papandreou has chosen to uphold, on Macedonia’s entry to NATO because of an 18-year-long dispute over the name of Greece’s northern neighbour. For the time being, though, Mr Papandreou may have to stay at home a bit more—and be sure that somebody in his office is keeping a close eye on the bond-trading screen