Greece will have to step up reforms, collect more taxes and cut spending further this year if it is to meet targets set by the EU and the IMF in return for a bailout that saved it from bankruptcy in May.
The debt-choked country, which is under threat of downgrade by the three main rating agencies, must also identify more savings worth 5 percent of GDP for 2012-2014 before its lenders come for their next inspection visit in February.
Investors question whether Prime Minister George Papandreou's government can sustain such fiscal pain in the face of a bleak economic outlook and public discontent.
Greece expects the EU and the IMF to give it more time to repay the 110-billion-euro loan and hopes this will dilute fears that it may need to restructure its debt after the bailout expires in 2013.
Following are the key political risks ahead:
MEETING TARGETS
The slumping economy, hit by the austerity measures, is making it harder for the government to generate revenue and shrink the budget hole as fast as projected.
Its lenders have said it will miss its 2010 general government deficit target, but is nevertheless broadly on track with the program and might still meet a cash deficit target.
The government has pledged to increase VAT, freeze pensions and cut government waste further this year to meet the terms of the bailout.
What to watch:
- The 2010 central budget execution figure, expected by mid-January.
- How the government proceeds with controversial plans to open up closed professions such as architects and pharmacists, and whether it succeeds in cutting spending on health and on loss-making state firms, and boosting tax collection.
- The next EU/IMF/ECB visit, scheduled for February, and plans for more belt-tightening in 2012-2014 to meet a target of getting the deficit under the EU cap of 3 percent of GDP in 2014.
SOCIAL UNREST
After months of declining turnout at protest rallies, unions gathered about 50,000 protesters against the 2011 budget in mid-December, in the biggest and most violent march since three people died in protests in May.
Public support for the ruling Socialists has dropped markedly over the past months as austerity bites, but they are still more popular than the conservative opposition in opinion polls.
They won regional elections early in November, the first real ballot test for a euro zone government imposing draconian budget cuts, but record low turnout was seen as a warning to the party.
Analysts warn that anger could flare up at any time if the government fails to show that sacrifices are bearing fruit or eases up on fighting corruption.
At the end of December, a blast wrecked several cars in central Athens and damaged a courthouse and nearby buildings. A month earlier, leftist guerrillas sent parcel bombs to embassies in the capital.
What to watch:
- What happens with almost daily public transport strikes and whether the main labour unions carry out threats to call nationwide strikes after the Christmas holidays.
- Will the ruling party's lead keep falling in polls and will that affect lawmakers' decisions when they vote on reforms? Papandreou expelled four lawmakers last year because they voted against EU/IMF reforms. He still has the support of 156 lawmakers in the 300-strong parliament.
- Will urban guerrilla groups step up attacks? On Jan. 17, 13 suspected members of the anti-capitalist Conspiracy Fire Cells go on trial.
- In the medium term, will Greeks, however grudgingly, keep accepting austerity once the deficit starts going down and finances look better?
RECESSION
Analysts warn that pushing belt-tightening too far will deepen Greece's country's recession further, making deficit-cutting targets much harder to reach, and increase the risks of social unrest as unemployment increases.
The economy contracted by 4.2 percent last year, according to government estimates, making it Greece's deepest recession in almost 40 years. It is seen shrinking by another 3 percent this year and key indicators show a bleak picture: tax hikes have pushed prices far above the euro zone average; unemployment is forecast at 14.6 percent in 2011; producer prices are increasing while credit growth has slowed and retail sales fallen.
What to watch:
- Key indicators: November industrial output (Jan. 10); December inflation (Jan. 11); October unemployment (Jan. 13)
- What happens with plans for consolidation of the banking sector
- Whether Greec manages to attract more foreign investment, after Qatar dropped plans in October to build a 3.5 billion euro energy hub there
RATING CUTS, RESTRUCTURING?
Greek and EU officials regularly say that the country will not default but markets are still worried, putting pressure on banks and insurers exposed to Greek sovereign debt.
The three main rating agencies -- Moody's, Standard & Poor's and Fitch -- have all put Greece on review for possible downgrade and rating cuts may come as early as January.
In September, Greece started issuing T-bills twice a month. But in November, after declining for two months, yields rose on concerns about the euro zone debt crisis and the upward revision of Greek deficit and debt
The public debt agency did not hold T-bill auctions in December but will start again this month.
What to watch:
- Will Greece lose Fitch's investment grade rating, and so be rated as junk by all three major agencies? And will the other two cut their ratings further?
- Any more comments on the prospect of Greece getting more aid once the 3-year package runs out if needed to avoid default
- Any details on plans to sell longer-term debt some time next year and tap Greek money abroad through 'diaspora' bonds
REUTERS
http://www.reuters.com/article/idUSRISKGR20110105
