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Greece faces treasury bills auction test

By Kerin Hope in Athens

Published: January 12 2009 02:00 | Last updated: January 12 2009 02:00

The Greek government this week faces a critical test of its efforts to prevent a sharp economic downturn when it holds an auction of treasury bills aimed at financing its already swollen public debt.

On Friday Standard & Poor’s, the ratings agency, warned it may downgrade Greece’s single A sovereign rating, the lowest in the eurozone.

The cost of financing the public debt – already the second-highest in the eurozone at 94 per cent of gross domestic product – is set to reach a record 4.6 per cent of gross domestic product this year, according to budget projections.

Unlike many of its European partners, Greece is not expected to fall into recession this year. But gloom is setting in with the economy expected to expand by only 2 per cent this year, after a decade of annual growth about 4 per cent.

Tourism and shipping, the pillars of the Greek economy, both look shaky. Tourist numbers are set to shrink by 5-10 per cent this year, led by a sharp fall in US bookings.

Shipping has been hit hard by the global slowdown, with freight rates for dry cargoes slumping more than 70 per cent at the end of last year.

Yiannis Papathanassiou, the new finance minister, has the difficult task in his first full week in the job of advancing plans to improve revenue collection and holding down spending.

A former finance under-secretary, he replaces George Alogoskoufis, who took the blame for the country’s weakening economic prospects in a cabinet reshuffle last week.

Spreads on Greek 10-year bonds over German bunds widened to 230 basis points after Friday’s downgrade warning, approaching levels reached during last month’s rioting in Athens.

The debt management agency hopes to use the auction tomorrow to attract buyers by offering T-bills with maturities of up to 12 months and a higher coupon, rather than its usual issues of medium and long-term bonds.

The 2008 budget deficit is already set to exceed 3.5 per cent of gross domestic product – well above the limit for eurozone members – against a target of 2.7 per cent, following a second-half collapse in tax revenues.

Analysts said this year’s target of increasing revenues by 10 per cent, equivalent to two percentage points of GDP, looks increasingly hard to achieve.

«The fiscal situation is going to be difficult. In times of crisis, tax evasion is seen as a tool for survival,» said Michael Masourakis, chief economist at Alpha Bank.

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