Greek economy set to shrink further

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Greece faces another year of recession in 2010 with the economy set to shrink by 0.3 per cent on top of a 1.5 per cent contraction this year, the finance minister said on Thursday.

But the new Socialist government still hopes to reduce next year’s budget deficit to single digits through targeted spending cuts and a crackdown on tax evasion.

“The situation is difficult – the recession is deeper than we thought and the tax collection mechanism is in disarray,” said George Papaconstantinou, finance minister, presenting the budget to parliament.

The government aims to increase revenue next year by 9 per cent through one-off measures and a drastic overhaul of the revenue service. Spending would be cut by 1.4 per cent.

Mr Papaconstantinou this week announced an extra tax on 2008 company profits and high-end property intended to raise €1bn.

The budget assumes the deficit would fall to 9.4 per cent of gross domestic product from a projected 12.7 per cent of GDP this year.

“The target is ambitious but do-able – and it hinges on strong implementation. If they don’t succeed markets may penalise Greece,” said Platon Monokroussos, head of financial markets research at EFG Eurobank in Athens.

Moodys last week downgraded its outlook for Greece, citing concern over the deficit and public debt. Fitch in October cut the country’s rating by one notch to A minus.

Mr Papaconstantinou and his team face pressure to deliver, given European Commission scepticism about Greece’s ability to regain control of its public finances.

The Commission’s latest forecast predicts the deficit will remain above 12 per cent in both 2010 and 2011.

Without a swift return to high positive growth rates, Greece’s public finances will remain fragile because of high levels of debt, Mr Papaconstantinou warned.

“The public debt is a time bomb ticking away in the foundations of the economy,” he said.

Greece will spend €12.9bn – equal to 5.1 per cent of GDP – on interest payments next year to fund the public debt, according to the budget.

The debt is forecast to rise next year from 113 per cent to 124 per cent of GDP and remain the highest among eurozone member-states.

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