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ANALYSIS - Data start to show grounds for optimism on Greece

PARIS (Reuters) - Three months after Greece obtained the first tranche of an international bailout, economic data are starting to show grounds for cautious optimism that Athens can halt the rise of its debt mountain in coming years without defaulting.

A Greek euro coin is seen amongst coins of other Euro zone countries in Athens April 11, 2010. REUTERS/Yiorgos Karahalis

Greece got a thumbs-up on Thursday when the European Commission, the International Monetary Fund and the European Central Bank ended a two-week review of its fiscal reforms, saying the country had made “a good start”.

The review found Athens was so far implementing austerity measures “as agreed”. The steps, and more like them needed in coming months and years, are key for Greece to slash its primary budget deficit from 8.6 percent of gross domestic product in 2009 to 2.4 percent this year, and to improve further to a 6.0 percent surplus in 2015.

Also important are signs that Greece’s economy, although in deep recession, is faring slightly better than analysts had feared just a few months ago.

The Purchasing Managers’ Index for the Greek manufacturing sector rose for a second straight month in July after hitting a 13-month low in May, though it continued to indicate contraction. A stronger-than-expected economic recovery in the euro zone, particularly in Germany, also suggests Greece could well exceed its GDP target this year.

“The survey data suggests the contraction may not be as bad as thought,” said RBS economist Nick Matthews, though he added, “It is still early days.”

The possible impact of better-than-expected GDP on Greece's debt position can be seen in a simple spreadsheet model of the country's economy and its debt dynamics, prepared by Reuters. (To obtain the model, click )


Under Greece’s long-term economic plan, approved by the EC and the IMF under the bailout terms, real GDP is assumed to shrink 4.0 percent this year after a drop of 2.0 percent last year.

But if the economy were to contract by only 3.0 percent in 2010 instead of 4.0 percent, Greece’s sovereign debt as a ratio of GDP would rise more slowly to 131.8 percent this year instead of the 133.1 percent which the economic plan shows, the spreadsheet model shows.

The difference is small compared to the total size of the debt but still equivalent to close to 3 billion euros. It is not negligible in the context of the government’s austerity steps; for example, Athens is raising tax on gasoline, cigarettes, electricity and luxury goods to raise 1.1 billion euros of additional state revenues this year.

The EC and the IMF said on Thursday that they now expected Greek inflation this year to be 4.75 percent, instead of their initial assumption of 1.9 percent.

Plugging a similarly large increase beyond the initial assumption into the forecast for the GDP deflator, another measure of inflation, in the spreadsheet model shows the debt-eroding impact of inflation.

A 3.0 percent drop in economic growth and a GDP deflator of 3.85 percent in 2010 yield a debt ratio for this year of 128.6 percent of GDP, more than four percentage points below the economic plan’s assumption.

The spreadsheet model cannot capture political risks in Greece, the danger that prolonged austerity could destabilise the government and cause it to backtrack on reforms. It is not an econometric model so it does not fully show how different inputs can affect each other -- for example, the way tax revenues might react to changes in GDP.

But the model does illustrate how uncertainties in Greece’s economic plan can run in a positive as well as a negative direction.

Greek Finance Minister George Papaconstantinou said on Thursday that he hoped to beat the target of cutting Greece’s overall budget deficit to 8.1 percent of GDP this year, despite lower-than-expected revenues in the first half.

That implies some reforms may be proving more effective than expected in restraining expenditure.

If this translates into an additional improvement of just 0.1 percentage point in the primary budget balance this year and in coming years, and given revised GDP and inflation figures for 2010, Greece’s debt ratio in 2015 will be 133.0 percent instead of the 139.0 percent now assumed in the country’s long-term plan, the spreadsheet suggests.

Editing by Andrew Torchia