Greece claims deficit cut by 40% in first half of year

Greek Finance Minister George Papaconstantinou
Image caption Greek Finance Minister George Papaconstantinou says he aims to protect public services

Greece's Finance Minister, George Papaconstantinou, has said the country cut its deficit by 42% this year.

He hoped Greece would be able to borrow from financial markets again by 2011.

It means the country is beating a target set by the IMF and EU under the terms of a 110bn-euro (£73bn, $88bn) emergency loan extended this year.

According to Greek central bank data, the government's deficit was 11.5bn euros in the first half of the year, down from 19bn euros a year earlier.

The deficit for the first six months stood at 4.9% of GDP, well inside the IMF target of 5.8%.

The Greek government has vowed to cut the full-year deficit to 8.1% of GDP, from 13.6% last year.

The turnaround in the primary deficit - which ignores debt service costs and is the best measure of financial stability - was even more striking, falling 56%.

No surprise

The announcement comes as no surprise, according to Professor Kevin Featherstone of the London School of Economics, although the exact numbers are new.

"They have been making comments about the improved deficit for a number of weeks," Professor Featherstone told the BBC.

The Athens Stock Exchange was unmoved, closing only 0.1% down on Monday, an hour after the finance minister made his comments.

Professor Featherstone, who heads the LSE's Hellenic Observatory, said that the data could however be taken as a "reliable signal", because it came from the central bank.

"The bank is politically independent," he explained, adding that its governor was "the first to break cover" after elections last October and come clean on the deficit.

It was revealed that the 2009 deficit was three times worse than had been admitted by the outgoing government.

'Overly pessimistic'

Total government spending was cut 15% to 30.1bn euros, while revenues rose a moderate 7% to 23.2bn euros.

Tax income was weighed down by the continuing Greek recession, and fell "slightly behind" target, according to the finance minister.

However, Mr Papaconstantinou described the official government forecast of a 4% contraction in Greek GDP this year as "overly pessimistic", and thought the number would be nearer 3%.

Meanwhile, the public spending cuts have met with vitriolic opposition from trades unions.

The country has suffered a series of general strikes in recent months, with a sixth strike scheduled for this Thursday, to coincide with a parliamentary vote that will raise the retirement age to 65.

Split down the middle

"There is a substantial body of opinion that is silently fatalistic [about fiscal austerity], counterposed by tremendous union militancy," said Professor Featherstone.

A weekend opinion poll produced by Kappa Research found public opinion split down the middle, with 49% accepting austerity and 48% opposed.

Of the 49% in favour, 35% considered the deficit cuts to be necessarily but unjust - hardly a ringing endorsement.

Support for austerity had been as high as 75% in February, but this was before the details of the pain were fully known.

Default risk

Greece has been effectively cut off from the bond markets in recent months amid fears the country will default on its debts.

The cost of insuring against a Greek default via credit default swaps - a measure of the country's credit worthiness - remains at an exceptionally high 12% per annum.

However, Mr Papaconstantinou said the government would seek to borrow from markets as soon as next year.

This is despite the fact that the loan package Greece won from the IMF and EU should meet its borrowing needs until 2012.

Greece expects to draw down the next 9bn euros of the emergency loans by September, and a further 9bn euros by the end of the year.

Greece's access to this money depends on whether the IMF and EU are satisfied with Greece's progress in tackling the deficit.