May 5, 2015 / 9:07 AM / 4 years ago

EU Commission sharply cuts Greek growth, primary surplus forecasts

BRUSSELS (Reuters) - The European Commission slashed Greek economic growth and primary surplus projections on Tuesday and forecast deeper price falls and a higher public debt as a result of uncertainty that has dogged Athens policy direction since late 2014.

The Commission, which finished gathering data for its forecast on April 21, said it now expected the Greek economy would grow only 0.5 percent this year, after 0.8 percent in 2014 and accelerate to 2.9 percent in 2016, unless policies change.

Three months ago, the Commission forecast Greece would grow 2.5 percent this year and 3.6 percent in 2016 after a 1.0 percent expansion last year.

“The positive momentum, however, has been hurt by uncertainty since the announcement of snap elections in December,” the Commission said in its quarterly economic forecasts of main indicators for all 28 countries of the European Union.

“The current lack of clarity on the policy stance of the government vis-à-vis the country’s policy commitments in the context of the EU/IMF support arrangements worsens uncertainty further,” it said.

Greece is in fervent negotiations with its international creditors to secure more loans in exchange for reforms as it quickly runs out of cash and faces the prospect of default.

Greece’s primary surplus — the budget balance before debt servicing costs — will be only 2.1 percent this year, rather than the 4.8 percent projected only three months ago.

Next year it will be even worse — the surplus will be 1.8 percent of GDP, rather than the earlier expected 5.2 percent of GDP unless Athens changes policy.

The headline budget balance will also be much worse than thought only three months ago. Rather than a surplus of 1.1 percent, Greece will have a headline budget deficit of 2.1 percent this year.

A surplus of 1.6 percent forecast for 2016 has now turned into a deficit of 2.2 percent, unless policies change.

This deficit forecast assumes that Greece will get back almost 2 billion euros ($2.2 billion)in profits that the European Central Bank made on buying Greek securities at the peak of the sovereign debt crisis.

To get that money, however, Athens will have to reach an agreement with its creditors on reforms — a deal that has eluded negotiators for the last three months.

Because growth will be lower, Greece’s debt-to-GDP ratio will be higher than previously expected. Instead of having peaked last year at 176.3 percent of GDP, the debt will only have reached its highest point this year at 180.2 percent of GDP, before declining to 173.5 percent in 2016.

($1 = 0.9011 euros)

Reporting By Jan Strupczewski; editing by Philip Blenkinsop

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