Greek riots to derail vital economic reforms

ATHENS Thu Dec 18, 2008 1:19pm GMT

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ATHENS (Reuters) - Greece's worst riots in decades are likely to deter political leaders from introducing overdue economic reforms, condemning the country to years in the doldrums.

Disturbances unleashed by the killing of 15-year-old Alexandros Grigoropoulos this month have caused hundreds of millions of euros of damage and shaken Greece's fragile conservative government.

They have also encouraged trades unions to step up their challenge to education and pension reforms, and to privatisations cautiously introduced by the conservative New Democracy party during 4 years in power.

"Even before the riots, reform was proving difficult but now it is going to be very, very difficult," said Diego Iscaro, analyst at IHS Global Insight.

"To achieve sustainable growth in the medium term, these reforms must happen. In the next five years, growth will be slower than what we've seen for a decade."

Greece's entry into the euro zone in 2001 helped fuel years of growth averaging 4 percent annually. Greece enjoyed access to European Union funds, low interest rates, robust exports to Balkan countries and a boom in shipping and tourism.

The prosperity masked weaknesses such as a current account deficit of 14 percent of GDP and one of the euro zone's lowest productivity rates.

Corruption ranks as the worst in the 15-nation euro zone, affecting education and health, and fostering anti-government resentment.

A bloated public payroll -- used by political parties to reward supporters -- has kept the deficit high. Despite attempts to cut back, it hit 3.5 percent of GDP last year -- above the 3 percent ceiling at which Brussels can impose penalties.

With the global crisis reaching Greece, the good times which hid these problems are over. Analysts say growth will dip under 1 percent next year, less than half government forecasts.

Chris Pryce, analyst at Fitch Ratings, says Greece's most urgent problem is a pension system costing the government 13 percent of GDP a year. A cautious reform in March sparked union rage and criticism from the socialist PASOK opposition party.

"New Democracy has been extremely reluctant to introduce reforms. This year, after five years of doing nothing, it made fairly modest reforms," Pryce told Reuters. "PASOK would be more in thrall to its union supporters, who wouldn't dream of accepting any kind of reform."

GOVERNMENT STRUGGLES ON

Few observers expect the riots immediately to topple the government, which trails in polls and has a one-seat majority after winning re-election last year despite devastating fires.

However, its survival beyond the next few months is uncertain.

"A more likely possibility is that these protests carry on for a couple of months, if not more than that, necessitating a call for early elections," said Teymur Huseynov, head of Eurasia Division at Exclusive Analysis, a strategic intelligence firm.

Unions called a rally and a nationwide three-hour work stoppage on Thursday, a week after a 24-hour general strike.

Analysts say the reforms opposed by unions could be the first steps towards curing high youth unemployment which fuelled the riots.

Labour groups agree on the need for pension and education changes, but slam the government for its lack of consensus-building and its right-wing agenda.

If the government falls, the only realistic alternative would be PASOK, which has a poll lead of five percentage points, perhaps in alliance with smaller Left parties.

New Democracy recovered from criticism of its handling of last year's forest fires and officials say Prime Minister Costas Karamanlis is preparing a cabinet reshuffle to try to claw back PASOK's poll lead.

"With the world economic crisis, whoever is in power will face unpopular choices to keep Greece stable," said Theodoros Livanios, head of research at pollster Opinion.

Economic stormclouds are gathering. Citigroup said in a research report this week it expects Greece's deficit to spike to 4.5 percent next year, as growth slumps to 0.5 percent.

The spread of Greek bonds to benchmark German bunds -- a measure of perceived risk -- reached record levels this week of more than 2 percentage points, potentially adding hundreds of millions to the cost of servicing Greece's debt.

With spending boosted by a 28 billion euro (26.6 billion pound) bank rescue scheme, Greece's debt to GDP ratio would rise from around 94 pct now to 108.5 pct by 2010, Citigroup said.

Credit ratings agency Moody's said on Wednesday that, with reform stalled and debt servicing costing 11 pct of GDP, it would take Greece's A1 debt rating -- already the lowest in the euro zone -- off positive outlook if instability continued.

"This is the worst moment to have political instability," said Iscaro. "Investors are looking for safer countries."

(Additional reporting by Renee Maltezou; editing by Keith Weir)

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