Country Report Greece December 2008

Outlook for 2009-10

• The Economist Intelligence Unit's central forecast is that the New Democracy (ND) government, which has a small absolute majority in parliament, should remain in office. A major cabinet reshuffle is likely in early 2009.
• There is though a risk of an early election if any ND members of parliament are implicated in corruption charges and removed from the party whip. The government is also threatened by riots in Athens and Thessaloniki.
• If there were to be an early election, the opposition Panhellenic Socialist Movement (Pasok) would be unlikely to secure an absolute majority, implying that agreements with other parties would be needed.
• The banking sector has so far not been as severely affected by the international financial crisis as in many other countries, but there are risks that the sector could require state aid, as it is heavily exposed to the Balkans.
• We expect that the administration will miss its targets for reducing the government deficit, and, although not our central forecast, there is a risk that the deficit will exceed the 3% of GDP ceiling in 2009-10.
• Rising debt-servicing costs, a sharp slowdown in credit growth, high inflation and falling business confidence mean that domestic demand is likely to slow.
• The current-account deficit will narrow as consumer, investment and import growth slow and there is a strong surplus in net transfers and services.

Monthly review

• Riots broke out in Athens after police killed a 15-year-old boy. Unable to stem the violence, the government's stability is threatened by the social unrest.
• According to opinion polls released in November and December, Pasok's lead over the ruling ND widened to between 3.7 and 7.7 percentage points.
• Relations with Turkey took a turn for the worse after a Norwegian vessel, on loan to a Turkish company, sailed into Aegean waters to undertake geophysical surveys for hydrocarbons.
• The government revised its projections for the 2008 and 2009 budgets upwards to a still optimistic 2.5% and 2% of GDP, respectively.
• After a month of discussions with the government, all banks in Greece agreed to participate in the government's 28bn liquidity injection scheme.
• GDP growth decelerated from 3.6% year on year in the second quarter of 2008 to 3.1% in the third. This decline was primarily the result of a strong contraction in investment, mainly in housing construction.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52