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• The plan also contains a number of measures to
boost competitiveness, growth and strengthen
capitalisation of domestic banks. These include:
i. Restructuring of the labour legislation
framework;
ii. Reinforcement of flexibility in the labour
market;
iii. Measures to tackle uninsured and illegal
labour;
iv. Restructuring of the social protection
framework;
v. Reforming the regulatory framework for
competition; and
vi. Establishing a new investment framework
through a new development law, to attract
foreign investment.
These measures are an essential part of the
adjustment process. While a sharp rebalancing in
tax revenues and spending is needed in the short
term, fiscal sustainability in the long term requires
a return to more elevated and sustainable growth
rates, which in turn require a significant
improvement in Greece’s external
competitiveness.
• Finally, it contains an overhaul of the pension
system including:
i. Increase of women’s minimum retirement
age to 65 years by the end of 2013, with the
process starting in 2011;
ii. Pensions to be calculated on the basis of
earnings over the whole labour life cycle;
iii. Increase in the minimum early retirement
age to 60 years;
iv. Increase of minimum contribution period
from 37 to 40 years by 2015;
v. Automatic adjustment of pensions to life
expectancy; and
vi. Reduction in the number of social security
organisations (to three);
The proposed pension reforms are a relevant aspect
of the plan with potentially significant implications in
the long term. The EU Commission estimated that,
on unchanged legislation, age-related public
spending would increase by 16% of GDP between
2010 and 2060.
Overall, the plan is certainly coherent, based on a set
of more realistic assumptions than in the past and
potentially able to deliver what Greece needs most at
the moment, which is credibility.
But the implications for growth of the envisaged fiscal
correction, which are more credibly spelled out this
time, would be massive. As we emphasised in
previous research, such an adjustment in such a
short time is unprecedented across advanced
economy and its drag on GDP and employment is
likely to be significant, questioning its social
feasibility. This emphasises there is a persistent
implementation risk which markets will continue to
price in for a while.
Moreover, even if the adjustment is implemented as
planned, Greece would still land up with a debt-to-
GDP ratio of around 145% in 2014. Under the
assumption of nominal growth of 4% and interest
rates of 6%, Greece would need a primary surplus of
2.8% to stabilise the debt-to-GDP ratio at these
levels. But under different assumptions for growth,
the scenario would be less favourable. Persistent low
nominal growth (equal to or less than 2% for
example) is likely to be associated with higher risk
premia (interest rates at or above 6%). In that case,
the primary surplus needed to stabilise the debt-to-
GDP ratio would shoot to 7.1% of GDP. This would
probably be too costly from a social point of view,
opening the door again to alternative options such as
debt restructuring (for more on the possible
scenarios for the Greek outlook see “Greece: What’s
Next?” published on 29 April 2010).
Table 1: Greece Economic Forecasts - Under the New Fiscal Adjustment Programme and the SGP
Forecasts under Greece's New Fiscal Adjustment Programme
2009 2010 2011 2012 2013 2014
Inflation (% y/y) 1.3 1.9 -0.4 1.2 0.7 0.9
GDP (% y/y) -2.0 -4.0 -2.6 1.1 2.1 2.1
Budget Balance (% GDP) -13.6 -8.1 -7.6 -6.5 -4.9 -2.6
Gov Debt (% GDP) 115.1 133.3 145.1 148.6 149.1 144.3
Forecasts under the SGP
2009 2010 2011 2012 2013 2014
HICP (% y/y) 1.2 1.4 1.9 1.8 1.8 -
GDP (% y/y) -1.2 -0.3 1.5 1.9 2.5 -
Budget Balance (% GDP) -12.7 -8.7 -5.6 -2.8 -2.0 -
Gov Debt (% GDP) 113.4 120.4 120.6 117.4 113.2 -
Source: Greece's SGP, Greek Ministry of Finance
Luigi Speranza/Gizem Kara 7 May 2010
Market Mover
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