Greece Sees Deficit Gains, but IMF Warns on Debt

Associated Press

Greece says it is due to meet a key deficit-cutting target this year, but the International Monetary Fund warned the country’s outlook remains dark and new cuts will be needed.

Deputy Finance Minister Christos Staikouras said the budget deficit for January to September was 2.66 billion euros ($3.6 billion), significantly less than the 8.27 billion-euro target. Excluding the cost of debt servicing, there is a 2.62 billion-euro surplus, better than the target for a roughly equivalent deficit.

“The first positive signs of the country exiting the crisis are there,” he said.

The IMF, however, poured cold water on Greece’s hopes, forecasting the country would need to pass new cost savings through 2016. Greece had hoped to not have to make any more such austerity measures, which have ravaged the economy.

Because the IMF is — alongside eurozone countries — giving Greece rescue loans, its views carry weight. It is unlikely to allow the payment of more bailout loans, which are issued in quarterly installments, unless it finds Greece’s debt outlook is sustainable.

Finance Minister Yannis Stournaras, however, ruled out any new income cuts or tax increases .

“It is out of the question,” he said.

Greece’s debt is due to reach 175.5 percent of GDP this year and must fall below 110 percent by 2022. The IMF says Greece’s European bailout creditors will have to forgive some of the loans the country owes them to render the debt manageable, an unpalatable outcome for major creditors such as Germany.

European governments have committed to help Greece manage repayment of its rescue loans, provided it meets its targets. But while some easing of repayment terms is likely, a cut in the actual outstanding sum would be hard to sell to Europe’s taxpayers — even were their governments in favor.

Meanwhile, new data illustrate the social impact from nearly four years of austerity.

The unemployment rate — the highest in the 28-member European Union — reached 27.6 percent in July from 27.5 percent a month earlier. Youth unemployment was 55 percent. Industrial output fell 7.2 percent in the year to August, with both imports and exports dropping sharply.

The government expects the economy to start growing again next year — the first average annual growth since 2007 — but only at an anemic rate of 0.6 percent.

It also forecasts modest jobs growth next year, although unemployment is set to remain at an average 26 percent. The biggest labor union, the GSEE, expects unemployment to exceed 30 percent in coming years.

Don't bet on Greece's exit from recession: Business leader

A draft budget forecast on Monday said that Greece could finally emerge from six years of recession that were brought on by the financial crisis. It confirmed it would post a budget surplus before interest payments this year for the first time in over a decade.

The budget also predicted the economy would grow by 0.6 percent next year thanks to a rebound in investment and exports including tourism.

The figures might appear modest but for Greece, they represent a glimmer of hope after six years of recession brought on by the financial crisis. Since 2010, it has relied on two 240 billion loans from international lenders on the condition that the Greek government impose tough austerity measures on the people, including widespread government spending cuts and tax hikes.

Unemployment is still the highest in the euro zone too, with more than one in four people without a job although for the first time in almost four years, the unemployment rate fell to 27.1 percent in the second quarter of 2013, from 27.4 percent in the first quarter.

(Read more: Greece’s problems are still Germany’s problems)

Costas Michalos from Athens’ Chambers of Commerce said that although things were improving, there was a long way to go before Greece could inspire confidence among foreign and local investors.

“The situation is much better both from the political angle and the real economy than it was a year ago. However, as far as reforms are concerned, particularly concerning privatization, we really need to move forward in quicker steps than we’re doing at the moment,” he told CNBC Europe’s “Squawk Box.”

“If you don’t provide the necessary confidence level that is required for potential foreign investors to come in by showing the example yourself through public investment [then investors will never come].” Michalos said that the Greek government had slashed its public investment In order to get a primary surplus this year and this was a “bad sign.”

Despite Michalos’ warnings, Greece has attracted foreign investment from companies looking to profit from the government’s enforced sale of state assets. Billionaire investors John Paulson and a clutch of bullish U.S. hedge funds are leading a charge into Greek banks, confident that Greece, long seen as the weakest economy of the euro zone periphery, was on the turn.

Michalos dismissed such investment, however. “With all due respect, John Paulson and other foreign investors may be putting funds into the Greek banking system but the taps are closed completely. The system is stagnant…and there is no serious liquidity in the market.”

(Read more: Greece’s Piraeus Bank warns of rising bad loans)

Greece’s debt pile is still the largest in the euro zone and is set to top 175 percent of gross domestic product this year. The government has little option but to raise revenues through further unpopular taxes on a struggling populace. Despite “extremely” high taxation levels, Michalos said Greece had no tax auditing mechanism capable of bringing in the necessary taxes to send a message of stability to investors, however.

“Expenditure is slowing coming down but we don’t have a tax system that has a time base of at least 5 years that passes a message of stability to foreign and local investors. In combination with the major, major problem in the Greek economy which is liquidity, those are the two major issues that need to be resolved.”