Greece Other


Greece to adopt further austerity measures while another bailout is underway

On 3 June, the negotiations between Greece and representatives from the so-called ?troika? (European Commission, European Central Bank and IMF) concluded with a not yet published assessment of the policies needed to maintain the EUR 110 billion bailout programme on track. The Greek government unveiled yet another set of measures worth EUR 6.0 billion (USD 8.6 billion) to reduce the massive fiscal imbalances, including spending cuts, significant downsizing of public sector employment, restructuring or closure of public entities and ?rationalization of entitlements?. On the revenue side, authorities will reduce tax exemptions, raise property taxation and step up efforts to fight tax evasion. Moreover, the government plans to sell off EUR 50 billion (USD 73 billion) of state-owned assets over the next five years, including iconic entities, such as the Hellenic Telecommunications Organization, Public Power Corp, Postbank and the ports of Athens and Thessaloniki. Only if these conditions are met will Greece receive the fifth instalment at the end of June. However, even after receiving the next tranche of the current EU-IMF agreement, the country may require yet another bailout to cover its financing needs for 2012 and 2013. This new aid package, may be approved in late June and could exceed EUR 100 billion (USD 146 billion). At the current juncture, policymakers have not yet reached a conclusion on how private bondholders can share a part of the burden. Negations focus on some form of debt rollover, in which investors would exchange short-term debt for longer maturity debt, which would imply technical default. However, authorities are keen to find a solution that does not prompt the rating agencies to declare default in order to avoid knock-on effects across the weaker Eurozone members. Credit rating agencies have already started to reflect fears about debt restructuring/rescheduling. On 27 May, Fitch downgraded Greece's long-term rating by three notches from BB+ to B+ with a negative outlook. The severity of the downgrade has the objective of ?raising market perceptions of the inevitability of some form of debt restructuring? as well as addressing the fact that ?it is very unlikely that Greece will be able to regain market access during the remaining life of the IMF-EU programme (May 2013).? Moreover, on 1 June, Moody's followed Fitch and slashed Greece rating by three notches to Caa1, due to ?the ever-increasing scale of the implementation challenges facing the government, the country's highly uncertain growth prospects and a track record of underperformance against budget consolidation targets.? The government and the troika expect that with the new measures, the fiscal deficit will moderate to 7.4% of GDP in 2011.

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