Greece in economic and social chaos

The economic outlook in Greece has been revised to "negative" by one of the 'big three' ratings agencies despite the country's eurozone bail-out and there were suggestions that the nation may need an extra €7bn to stay afloat financially. The move to alter the Hellenic Republic's sovereign credit rating from "stable" to "negative" by Standard & Poor's suggests that politicians and officials may have to return from their summer holidays, should the single currency crisis escalate further. Street protests and violent racist attacks have also spiked in recent weeks.

Many economists had already predicted that Greece would soon be forced to exit the eurozone. And the S&P's report suggested that Greece would have to seek further bail-out funding of up to €7bn from the European Union and International Monetary Fund, in order to remain inside the single currency. But the ratings agency also maintained that the Greek government would fail to make the further public spending cuts necessary for the country to receive the next trance of its agreed bail-out, which was due for payment in the autumn.

Explaining the rationale for the revision, a spokesman for S&P's said: "The negative outlook reflects the potential for a downgrade if shortfalls in Greece's 2012 deficit and arrears targets established under the current EU/International Monetary Fund programme are not met by new funding or other relief from members of the Troika - the EU, the European Central Bank and the IMF. We see the likelihood of shortfalls, owing to election-related delays in the implementation of budgetary consolidation measures for the current year, as well as the worsening trajectory of the Greek economy. We project gross domestic product will contract by 10 to 11 per cent cumulatively during 2012-2013, versus the negative 4 to 5 per cent assumed by the EU/IMF programme.

"In our opinion, the deepening contraction in Greek GDP beyond the EU/IMF programme's assumptions and the related worsening of the fiscal position imply a high likelihood that Greece will require additional financing of as much as €7bn or 3.7 per cent of GDP for 2012. This takes into account a fiscal deviation of at least €3bn or 1.5 per cent of GDP."

Evaluating the country's economic performance at the start of this year, the S&P's stated: "In the first quarter of 2012, Greek real GDP contracted by 6.5 per cent year on year, with domestic demand collapsing by nearly 11 per cent over the same period. Assuming a contraction of 7 per cent during 2012, Greek GDP is likely to be 21 per cent below its 2007 peak by year-end in volume terms; reflecting five consecutive years of economic depression, during which unemployment has soared from 7.9 per cent to 22.5 per cent. As a result of this economic weakness and due to an absence of progress on tax administration reforms, collection of personal, corporate and indirect taxes is well below target.

"The severe liquidity squeeze in the Greek economy is visible in rising public sector arrears and negative credit and deposit growth. At present, we understand that public sector arrears amount to approximately €6bn to €7bin, or an estimated 3 to 3.5 per cent of GDP - as the central government and public companies continue to delay payment to suppliers. Over the last two years, the total stock of lending to Greek residents has contracted by 12 per cent of GDP. Without credit returning to the real economy - the perspective for a recovery in economic activity, employment and fiscal consolidation continues to be gloomy."

Setting out the uphill battle Greece faces to achieve the reforms necessary to receive its next bail-out payment, the S&P's report stated: "To convince the EU and IMF will mean moving ahead with a mixture of further public sector salary cuts, headcount reductions, pension adjustments, as well as most probably the elimination of energy subsidies. On the revenue side, the Troika is likely to require more measurable progress on reorganising the tax administration, as well as on collection of the special property tax. We continue to see major impediments to the full implementation of these measures, many of which are institutional in nature. Moreover, the fiscal adjustments, if implemented, will in our view prolong the contraction of the economy, leading to a further loss of popular support for future fiscal and structural reforms and hence weakening the new government's already tentative mandate. "

Meanwhile, campaign group Human Rights Watch has reported that the Greek authorities have been rounding up migrants for deportation "based on little more than their physical appearance" in violation of international and EU laws. The efforts were thought to be an attempt to reduce the country's welfare bill, stamp out the black economy and win electoral support from nationalist voters.

"Greece has the right to enforce its immigration laws and after a fair process, to deport people with no legal basis to stay in the country," said Benjamin Ward, deputy director of the Europe and Central Asia division at Human Rights Watch. "But it doesn't have the right to treat people like criminals or to presume irregular immigration status just because of their race or ethnicity." The campaign group also highlighted a rise in xenophobic violence in the country – with gangs attacking migrants and asylum seekers without punishment by the authorities. "Greek police have a duty to protect all foreigners from violence, just as they do Greek citizens," added. Ward.

In a further development that signalled additional pain for the eurozone, German industrial production fell by 0.9 per cent in July. A spokesman for the British-based Capital Economics think-tank said: "Business surveys point to much steeper rates of contraction over the coming months. As such, there are few signs as yet of any boost from the drop in the euro exchange rate. With the supposedly ultra-competitive German manufacturing sector in recession, the omens for the rest of the eurozone economy are extremely worrying. Spanish industrial production figures already released this morning showed a 6.3 per cent contraction in the year to June. Needless to say, such a weak economic environment will make further fiscal progress in the indebted peripheral economies very difficult indeed."