RECENT STRAINS IN THE GREEK ECONOMY AND THE SHORT-TERM OUTLOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002400080001-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 9, 2016
• Document Release Date: July 7, 2000
• Sequence Number: 1
• Publication Date: October 1, 1965
• Content Type: BRIEF

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RECENT STRAINS IN THE GREEK ECONOMY
AND THE SHORT-TERM OUTLOOK
DIRECTORATE OF INTELLIGENCE
Office of Research and Reports
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This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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 Approved For Release 2000/QB/29=ICI RDR79MINA93ACI4249GO80001-6
RECENT STRAINS IN THE GREEK ECONOMY
AND THE SHORT-TERM OUTLOOK
Soon after becoming Premier, George Papandreou. began to fulfill
his promise, often repeated during the election campaign, to bring
about a more equitable distribution of the nation's income. He used
receipts from taxes on middle and upper income groups to subsidize
farmers and other rural groups. Because expenditures exceeded tax
receipts, it became necessary for the government to increase its rate
of borrowing. These fiscal policies resulted in increases in both con-
sumer demand and the supply of money. That prices did not respond
upward. was due largely to the safety valve provided by increased
imports. The increased pressure was reflected, however, through
the balance-of-payments accounts in a serious outflow of foreign
reserves -- an outflow which probably was aggravated by the summer
political crisis. The drop in foreign reserves, although serious, is
not yet dangerous; the current level of reserves still provides a buffer
against a balance-of-payments crisis. Officials in the Stephanopoulos
government have expressed willingness to restore balance to government
fiscal policies, and, if the new government is able to bring about some
measure of political stability, a gradual improvement in the Greek
economy may take place.
1. Government Budgets
Receipts and expenditures of the government of Greece are pro-
jected and recorded in two budgets: a. regular budget, which contains
current items, and an investment budget. Prior to Papandreou's
taking power in 1964, the regular budget was kept always in a substan-
tial surplus. The surplus funds were transferred to the investment
budget, where they were combined with revenues collected specifically
for investment spending and with receipts from government borrowing.
Since 1963, regular budget expenditures have grown more rapidly
than regular budget revenues, thereby causing a significant decline in
the annual surplus, as shown in the following tabulation:
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Million US$
January - January -
1963 1964 1965 May 1964 May 1965
Actual Actual Budgeted Actual Actual
Regular budget
Revenues 730 825 940 302 335
Expenditures 67o 798 924 264 306
Regular budget
surplus 60 26 16 38 29
The increase in expenditures during 1964 was caused to some extent by
new defense outlays associated with the Cyprus crisis. Far more
important, however, were direct subsidies paid by the Papandreou
government to farmers, cancellations of rural debt, and improvements
in agricultural services which together accounted for roughly half
($55 million) of new regular civil expenditures. An additional $39 mil-
lion went for increases in educational and -social welfare programs,
predominantly in rural areas. Farmers also benefited from government
purchases of $75 million of surplus crops, chiefly wheat and tobacco,
bought at double their normal market price. These increased benefits
to rural areas were financed mainly out of increased tax receipts from
the cities, primarily receipts from luxury taxes, and constituted a
deliberate redistribution of income.
Such trends continued under the 1965 budget. The budget calls for
agricultural subsidies to increase by $13 million and allocations for
social welfare and education to be up $10Z million above those of 1964.
Larger government purchases of surplus crops also are forecast.
Furthermore, civil servants are to receive an increase of 7 percent in
both salary and pension, costing $30 million.
2. Government Borrowing
Declining regular budget surpluses have made it necessary for the
government to borrow increasingly to cover expenditures in the invest-
ment budget, as can be seen in the following tabulation of the total out-
standing end-of-year debt of the central government:
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Domestic debt
Prewar
Postwar
Foreign debt
Prewar
Postwar
Total
1963
1964
1965
(Estimated)
377
438
473
. 25
25
25
352
413
448
451
478
524
264
263
262
187
215
262
828
916
997
Although these increases in government debt are large ($88 million
during. 1964 and an estimated $81 million during 1965), the overall
size of the debt is no cause for alarm. The total debt at the end of
1964 amounted to less than 25 percent of national income, a relatively
low percentage compared with levels that governments in many indus-
trial countries consider sound. The onerous aspect of the new borrow-
ing is the rising proportion that is coming from abroad, 57 percent of
the total in 1965 compared with 31 percent in 1964. This places an
increasing burden on the government's foreign exchange reserves to
make the payments of principal and interest.
3. Effects on the Economy of Government Fiscal Policies
Several symptoms of impending difficulty appeared in the Greek
economy during 1964. Most serious was the rapid increase in the
level of consumer spending and the drain on foreign exchange reserves.
These trends arose largely as a result of the government's fiscal
policies.
During 1964, consumer spending rose 13 percent while the total
gross national product (GNP) of the economy increased by only 8. 5
percent. The government's transfer of income from high-income
groups, who save a relatively large share of their income, to low-
income rural groups, who save little, probably was the primary
cause of this unequal rate of increase. If the growth in consumer
demand continues to outstrip the growth in output of the economy, the
result is likely to be price inflation. Such an outcome would be inten-
sified by the increases in the money supply caused by government
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spending. The level of prices has not yet reflected the increases in
consumer demand and the supply of money, but, if inflationary pres-
sures continue to grow, stability will become increasingly difficult
to maintain.
One reason that prices have not increased is that much of the new
consumer spending has gone for imports. These have risen rapidly,
at a time when exports and other items earning foreign exchange have
been relatively -stagnant. A serious depletion of the country's hold-
ings of foreign exchange and foreign assets has resulted. Exacerbating
this drain of reserves have been the large-scale private purchases of
gold coin from the government, a speculative reaction that occurs dur-
ing most political or economic crises in Greece. Such purchases
probably amounted to between $70 million and $80 million during 1964,
primarily because of the Cyprus crisis.
The severity of the drain on foreign reserves during 1964 does
not show up in official statistics of foreign exchange holdings. The
real decline was largely hidden as the result of drawings on reserves
from surpluses in previous years that had been deposited abroad
through commercial banks. Because these funds now have been nearly
exhausted, the large drop in reserves likely to occur during 1965 will
be reflected as a drop in official reserves and a drawdown of the central
bank's special gold fund. At the beginning of 1965, official reserves were
$277 million. With a likely deficit in the balance of payments during
1965 of at least $65 million, officially reported reserves can be ex-
pected to fall to below $235 million by the end of the year and assets in
special funds to fall by about $30 million.
4. Effects on the Economy of the Summer Political Crisis
During the interim between the Papandreou and Stephanopoulos
governments this year, economic conditions in Greece deteriorated
further. A decline in tax collections led the government to cut back
its investment expenditures. At the same time, the Bank of Greece
tightened bank credits because depositors were withdrawing their
drachmas and converting them to gold sovereigns. Similarly, transac-
tions on the Athens Stock Exchange virtually ground to a halt as in-
vestors preferred to put their money into gold sovereigns.
With regard to the balance of payments, the political crisis probably
accelerated the drain on Greece's reserves of foreign exchange. While
imports remained at a high level, emigrant remittances, tourist receipts,
and the inflow of foreign capital declined.
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Although the Greek economy is ailing, the situation is not beyond
remedy. Factories, shops, and transportation continue to function
smoothly in spite of the political, turbulence, with economic repercus-
sions being limited mainly to the financial sphere. Even there, the
drop in foreign reserves, although serious, is not yet dangerous. The
current level of reserves still provides a fairly sizable buffer against:
a balance-of-payments crisis.
If the Stephanopoulos government succeeds in laying the ground-
work for political stability, the outlook for the next several months is
for gradual economic improvement. Officials in the new government
already have expressed willingness to reduce agricultural subsidy pay-
ments as well as to adopt other measures that will. enlarge the surplus
in the regular budget. This official shift toward economic conservatism
is likely to renew confidence among businessmen and foreigners and
thereby bring about an improvement in investment and the balance of
payments. If the new policies cut too deeply into the incomes of the
working class and farmers, however, agitation for a resumption of
Papandreou's more liberal economic policies is certain to break out.
Analyst:
Coord: OCI
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CONFIDENTIAL
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CONTROL RECORD FOR SUPPLEMENTAL DISTRIBUTION 25X1A
SERIES NUMBER
CIA/RR CB 65-58
CLASSIFICATION OF REPORT
CONFIDENTIAL
DISTRIBUTION TO RC
50
DATE OF DOCUMENT
October 1965
NUMBER OF COPIES
290
NUMBER IN RC
COPY
RECIPIENT
DATE
NO. (S)
SENT
RETURNED
7
D ORR
13 Oct 65
llk
8 & 176
DD/ORR
9
SA/RR
II
/,5~~~`~05
72
I/WE
14 Oct 65
177
5X1A 111111 O/DDI
15 Oct 65
178
CGS /HR/O s 1G81 H q.
II
179
5X1A St /p
II
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OCR
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181 2
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182-240
Filed in St/P/C
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21 October 1965
MEMORANDUM FOR: Chief, Dissemination Control Branch, DD/CR
FROM Acting Chief, Publications Staff, ORR
SUBJECT Transmittal of Material
It is requested that the attached copies of CIA/RR CB 65.58, Eeeent
Strains in the Greek Economy and the Short-Term outlookOctober 195;,
Coii 'ider,tial, be forwarded as follows:
State, INR Communications Center,
Room 6527, State Dept. Bldg.
Suggested distribution for
Embassies in Moscow, London, Ankara,
Athens, and dicosia
ACTI T E D MA C
The dissemination requested by
this memorandum has been completed;
pate: 'Pe-'4. t'J
Attachments:
Copies #191 #195 o CB 65-58
acs CGS/RB
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 woor I r ; TIAL
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Project No. 44. 5280
Title: Recent Strains in the
Report Series CIA/RR CB 65-58
(CONFIDENTIAL)
Responsible Analyst and Branch I/WE 25X1A
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Sources used in preparing Project 44.5280;
Air P-r- MR
A b?assy Athens, A-566, January 19, 1965, Central Government Budget(Lim.0f.Use)
A-942, May 26, 1965, Greece's Public Debt (Unclassified)
A-38,, July 15, 1965, Greek State Budget, CY 1965(Unclassified)
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