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The chief of the euro area’s crisis fund reiterated warnings that Greece risks missing its budget targets, in comments highlighting the challenges facing the continent’s most indebted state ahead of next month’s snap elections.
“We are confident there is great risk” that Greece will fall short of its commitment to maintain a budget surplus before interest payments equal to 3.5% of its economic output this year, Klaus Regling told reporters in Luxembourg. The need to maintain a stellar fiscal performance in perpetuity was part of the debt relief deal agreed with Greece’s euro-area creditors last year, and failure to meet its targets could lead to suspension of some relief measures.
Despite recent warnings about fiscal slippage, investors are sanguine, pricing in the election of a pro-business government in next month’s ballot, which is expected to abandon the incumbent premier Alexis Tsipras’s budget priorities toward a more growth-friendly mix. Greek bond yields hit another record on Thursday, while the Athens Stock Exchange is the best-performing primary equity index in the world this year.
Adding to signs of market exuberance, Piraeus Bank mandated the issuance of Tier 2 debt on Thursday, after several delays to meet regulatory requirements to raise more capital. Greek lenders are burdened by the highest ratio of bad loans in Europe, battling with the overhang of a crisis that left the country with the highest unemployment rate in the continent.
Regling’s comments point to the risk of renewed tension with European creditors this fall. The head of the European Stability Mechanism said that the Greek Parliament’s decision to scrap a planned lowering of the income-tax-free threshold is “regrettable” while lambasting Tsipras’s decision to boost spending and cut taxes without consulting with creditors first.
Demands for belt-tightening to correct the lapses caused by Tsipras’s pre-election spending spree are likely to be met with resistance by the next government. On the other hand, failure to meet the agreed budget targets could throw Greece’s debt sustainability projections off course, raising new doubts about the country’s finances.
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