The Greek government must make a “groundbreaking” effort to reduce its budget shortfall and debt and implement deeper spending cuts this year to overcome a lingering “credibility deficit,” Greek Central Bank Governor George Provopoulos said.
“The road to the exit from the crisis will be long and hard,” he said in a speech in Athens today. “This is why a greater effort will be required from all of us over a longer time. Our course in the forthcoming years will largely be determined by the target we set ourselves and our commitment to achieving it.”
Prime Minister George Papandreou on April 23 asked to activate a 45 billion-euro ($60 billion) package of emergency loans from the euro region and the International Monetary Fund after a surge in borrowing costs made it too costly to finance the country’s debt in the markets. The premier has cut wages and spending and boosted taxes to trim the budget deficit, though investors so far remain unconvinced the effort will succeed.
Greeks have lived beyond their means for years, coveting public-sector jobs and demonizing entrepreneurs, Papandreou said today. “We learned to live on loans” rather than increasing our incomes, he said in statements broadcast live on state-run NET TV.
The government’s measures to cut the shortfall to 8.7 percent of gross domestic product this year are “promising,” though not sufficient, Provopoulos said. Greece’s credibility has been so damaged by the surge in the deficit to 13.6 percent of GDP last year that “we must surpass ourselves and favorably surprise the markets, by achieving even greater improvements than the ones projected,” he said.
Deficit reduction this year should amount to more than 5 percentage points of GDP, Provopoulos said. The government should avoid pushing taxes any higher as that “would lead to a contraction, instead of an increase in revenue.”
The central bank’s forecast for an economic contraction of 2 percent this year faces a “high upside risk,” he also said. The country’s banks are likely to consolidate in the medium term after widening Greek 10-year bond spreads had a negative impact on their equity, Provopoulos said.