The Greek economy continues to shrink under the weight of the existing austerity programme which has resulted in high unemployment (24.4% in June 2012), declining public and private consumption, and higher taxes in the middle of an economic depression.
Central government expenditure is close to a primary surplus, i.e. a surplus in regular operations before counting interest costs and debt repayment. This is an impressive achievement given the depth of the recession and surging unemployment.
Despite these achievements, it is doubtful whether the Greek reform programme can be sustained. Greek interest costs have not been substantially reduced by the EUR 100 bln Private Sector Initiative (PSI) “haircut”. Instead of EUR 100 bln, the actual write-down by private banks is equivalent to EUR 40 bln, which is less than three years of interest costs.
As a result, Greece’s main problem remains high interest, which place the sustainability of its public finances in doubt. By end-2012, a combination of shrinking GDP and high debt interest will see the debt:GDP ratio return to 160%. Some 25% of central government budget expenditure will be oriented to debt service.
View the complete September 2012 Greek Economic Update