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Greece

Greek inflation differential with euro zone remains high

The differential between Greek inflation, as measured by the harmonised index of consumer prices (HICP), and the euro area average, narrowed to 1.1 percentage points in 2006 from 1.3 percentage points in 2005. Greek HICP inflation edged down to 3.3% in 2006 from 3.5% in 2005#while euro area inflation remained at 2.2% over the same period#as price pressures were dampened by the lower cost of imported petroleum products during the latter months of 2006. Greece has a higher dependence on oil in its energy mix than its euro zone partners, with oil accounting for over three-fifths of total energy, all of it imported. The domestic consumer price index (CPI), excluding fuels, stood 0.6 percentage point below the headline figure, at 2.7%. According to the stability and growth programme, official inflation forecast for 2007 is 3%, despite an assumption of a marginal increase in world oil prices. It will be largely the product of base effect. HICP inflation is forecast to remain at 3.3% in that year. The inflation differential impacts upon the competitiveness of Greek exports and is a major factor in the soaring current-account deficit (see Foreign trade and payments).

Trends in consumer, producer and wholesale prices

(% change, year on year; period averages) 2005 4 Qtr 3.7 3.5 2.3 7.7 4.7 3.5 2.4 3.9 5.8 5.7 5.4 28.7 8.9 Year 3.5 3.5 2.2 5.9 3.0 3.8 2.6 4.2 2.4 2.5 3.7 25.1 8.8 2006 1 Qtr 3.3 3.2 2.3 9.2 6.8 4.7 1.5 3.8 9.0 8.8 7.0 30.0 7.7 2 Qtr 3.2 3.4 2.5 8.6 7.2 7.6 1.7 3.4 7.6 7.4 5.9 21.6 6.8 3 Qtr 3.4 3.5 2.8 6.8 7.2 9.2 3.1 3.6 6.3 6.2 3.2 8.1 2.7 4 Qtr 2.9 3.2 2.3 3.0 4.3 8.6 2.7 3.2 1.5 1.6 0.8 -3.6 0.7 Year 3.2 3.3 2.2 6.9 6.3 7.5 2.3 3.5 6.0 5.9 4.2 12.9 4.4

Consumer prices HICPa Euro area average Producer prices (domestic) All items excl energy Intermediate goods Capital goods Consumer durables Consumer non-durables Consumer goods Industrial export products Fuels Wholesale import prices
a Harmonised index of consumer prices.

Sources: Bank of Greece, Bulletin of Conjunctural Indicators; National Statistical Service of Greece, press bulletins.

Financial indicators
Stockmarket resumes recovery after a week-long downturn There was short-term panic on the Athens Exchange (Athex) at the end of February and the beginning of March, following the plunge on the Shanghai stock exchange, which had knock-on effects on both emerging and mature stock markets around the globe. In just three days of trading, the general index of the Athex lost all of its 8% growth for the year to date, and over the following three days it lost another 1%. Frantic selling pushed up the daily trading volume almost twofold, from "406m to "797m. The shallowness of the market underpins the volatility in prices, as illustrated by the fact that the market was pushed into positive territory again on the back of just one days trading on March 6th, when investors (primarily foreign institutional buyers snapping up

Country Report April 2007

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The Economist Intelligence Unit Limited 2007

Greece

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bargains) entered into trades worth "955m (more than double the average daily trading volume during the year to date) and pushed the index back into the black. It has since performed moderately better than most other European exchanges and at the close of trading at the close of the second week of April stood at 4,808, with market capitalisation at "137.6bn. Demand for bonds remains strong Aggregate central government debt rose by 5% year on year in 2006 to stand at "226.2bn compared with 7.1% growth to "215.4bn in 2005. As a percentage of GDP, however, the level of debt fell to 116% in 2006 from 119% in 2005 and 119.5% in 2004. The government has been steadily extending its debt profile and by the end of 2006, 48% was held in bonds with maturities of five years and over, compared with 46.7% at the end of 2005. For 2007 the Public Debt Management Agency has announced that it plans to raise around "35bn in debt#some "4bn more than in 2006#because of a higher amount of tradable debt maturing in 2007 compared with a year earlier. A "5bn 10-year benchmark bond, issued in January, attracted strong demand ("9.3bn), while a "4bn 30year bond launched during the first week of February attracted nearly three times the volume offered ("11.2bn). The issue of 15-year inflation-linked bonds and a trial issue of a "500m-"1bn 50-year bonds is under consideration for the first half of 2007. In January 2007 a ratings agency, Moodys, upped its outlook on Greeces A1 government bond rating to "positive" from "stable", citing the countrys strong growth performance and the ongoing contraction of the public deficit and debt levels. However, in March Standard & Poors, while affirming its A and A- ratings on Greeces long- and short-term creditworthiness, warned that without a reduction in the overall debt level in the medium term, there could be pressure for a downgrade of the sovereign rating.

Interest rates
(%; end-period unless otherwise indicated) 2005 3 Qtr 2.00 2.13 3.41 3.21 4 Qtr 2.25 2.34 3.56 3.36 2006 1 Qtr 2.5 2.61 3.77 3.52 2 Qtr 2.75 2.9 4.28 3.96 3 Qtr 3.25 3.22 4.19 3.76 4 Qtr 3.5 3.59 4.07 3.81

ECB refinancing rate 3-month interbank rate Greek 10-year government bond yield German 10-year government bond yield
Source: Bank of Greece; Bloomberg.

Yields narrow in the secondary bond market

Trading in Greek government bonds on the electronic secondary securities market (IDAT), operated by the Bank of Greece, has recently been following international trends. In January prices weakened on bonds of all maturities in line with other euro area markets, forcing up the yield curve and increasing the steepness of the differential between the three- and 30-year bonds to 52 basis points. Yields on the three-year and the new 30-year benchmark bonds slid over the course of the month, to 3.96% and 4.46% respectively, from 4.06% (at the end of January) and 4.58% (on the first day of trading on February 1st). As a consequence, the steepness of the yield curve remained virtually unchanged. The spread between the Greek 10-year benchmark bond and comparable German bunds tightened fractionally, to 25 basis points, after having stood at 26 basis points over the previous three months.

Country Report April 2007

www.eiu.com

The Economist Intelligence Unit Limited 2007