Greece tests creditors and the markets with its 2019 spending plans

  • The pension cuts were due to start in January and were one of the most difficult reforms to come to an agreement.
  • Greece grew 1.4 percent in 2017 and it is expected to see a growth rate of 1.9 percent this year, according to forecasts from the European Commission.
A woman walks past a graffiti refering to the Greek debt and reading 'Forever a loan' outside the Academy of Athens building on August 28, 2017.
Louisa Gouliamaki | AFP | Getty Images
A woman walks past a graffiti refering to the Greek debt and reading 'Forever a loan' outside the Academy of Athens building on August 28, 2017.

Greece could be about to start another fight with its creditors and the financial markets.

The government unveiled last evening the first draft of its 2019 budget plan in which two scenarios were put forward for its spending plans and economic targets for the coming year.

One of them included planned and pre-legislated pension cuts, in line with its creditors' expectations.

The other spending plan does not include pension cuts, however, indicating that the Greek government is willing to make changes to reforms that it had previously agreed with its creditors.

The pension cuts were due to start in January and were one of the most difficult reforms to come to an agreement. Potential changes to pensions, or to other reforms, could spark confrontations with European institutions and the International Monetary Fund (IMF). The IMF said last month that the 2019 pension cuts are part of the reforms that the Greek government agreed to, and that Greece needs to show it is investor-friendly.

The 2019 budget is the first in nearly a decade without Greece being subject to a bailout program. Nonetheless, Athens promised on Monday to stick to fiscal targets that had agreed with its creditors. In fact, Greece has said it will over-deliver when it comes to its primary budget surplus.

Greece ended a third financial rescue in August and has vowed to stick to stringent fiscal targets in the coming years in exchange for some debt relief. Under such agreements, Greece must achieve a primary budget surplus of 3.5 percent each year until 2022. However, Athens said on Monday that it will reach a primary budget surplus, excluding debt servicing, of 4.14 percent of GDP in 2019.

"The primary budget surplus has been better than expected over the last years, reaching 4.2 percent in 2017 versus a 1.75 percent demand by the official lenders," Carsten Hesse, European economist at Berenberg, told CNBC on Monday

This has allowed the ruling Syriza party to make one-off payments of about 1.4 billion euros ($1.62 billion) to pensioners and other citizens hit by austerity last year.

Analysts told CNBC that expectations are that Greece will hit a budget surplus above 3.5 percent in 2018 too. But the government will only be able to be sure of that later in the year, and more precisely at the start of 2019, when the final figures are released.

This means that reversing reforms, changing pension cuts or any other similar decision might have to wait until later.

Why is Athens willing to reverse some reforms?

The center-right and opposition party New Democracy has been leading opinion polls against the ruling anti-establishment party Syriza. In the latest poll, conducted on behalf of the Proto Thema newspaper, showed last month a 10.9 percent difference between the two parties.

"The Greek government is under huge pressure to allow for some fiscal easing as it tries to catch up in polls before the elections in 2019," Ricardo Garcia, chief euro zone economist at UBS, told CNBC via email Monday.

"In addition, New Democracy is increasing pressure in advance of the elections by promising fiscal easing themselves. If Syriza isn't able to deliver fiscal easing before the elections, New Democracy's promises will look more credible," Garcia added.

Backsliding with reforms could also unsettle financial markets at a time when Greece is still vulnerable to shocks that are outside its control, however.

For instance, last week Greece's borrowing costs rose on the back on ongoing concerns regarding Italy, not Greece.

Greece is forecasting a lower public debt pile in 2019, from 183 percent of GDP this year to 170.2 percent next year. Needless to say, its debt pile is still, and by far away, the largest in Europe.