Country Report Greece September 2009

Summary

The Economist Intelligence Unit's central forecast is that Pasok will emerge as the largest party in the October 4th elections, but that it will not control an absolute majority, and a minority or coalition government will be formed.
Although Pasok leads by about 6 percentage points in opinion polls, it is possible that the centre-right New Democracy (ND) could win the elections. Even if it does not, ND could return to government in the next six months.
Greek banks are considered to be structurally sound following stress tests conducted by the central bank and the IMF. However, the banking sector may require further support, as it is heavily exposed to the Balkans.
We expect that the government deficit in 2009-10 will significantly exceed the ceiling of 3% of GDP established by the EU's Stability and Growth Pact (SGP).
As the government struggles to rein in its deficit and reduce its high levels of public debt, it will during 2010 reverse the fiscal stimulus measures that it implemented in 2008 and early 2009.
Rising debt-servicing costs, a sharp slowdown in credit growth, high inflation and falling business confidence will cause domestic demand to fall and exports will contract even more sharply.
The current-account deficit will narrow as weak domestic demand and the fall in the price of oil causes imports to contract in value terms, resulting in a significantly smaller deficit on the trade balance.

The prime minister, Costas Karamanlis, decided to dissolve parliament on September 7th to pave the way for an early election on October 4th. By calling an early election, Mr Karamanlis seized back the initiative from Pasok.
In mid-August a court in Munich accused former party treasurers Costas Geitonas (Pasok) and Yiannis Vartholomaios (ND) of negotiating bribes with former chief executive officer of Siemens Hellas, Michalis Christoforakis.
Although the government made a commitment under the EU's excessive-deficit procedure to target a general government deficit of 3.7% of GDP in 2009, provisional fiscal data show that this target is unlikely to be met.
According to a recent study by the European Commission Ageing Working Group, Greece faces the second highest long-term ageing costs of any euro area country.
GDP declined by 0.3% year on year in the second quarter of 2009. This figure may be revised downwards, as the consumption figures released do not reflect a sharp fall in retail sales.