Two bailouts of $325 billion haven’t been enough to slow Greece’s economic decline, even with big pay cuts, tax hikes and slashed pensions so the country will probably need more money and debt relief from European countries, according to a report by the International Monetary Fund staff.
The IMF, along with the European Union and European Central Bank makes up the EU-IMF-ECB Troika that is putting up the money. The report resurrects the idea that Greece will yet have to impose losses on the lenders the same it did when it hit private investors with 74 percent cuts in their bond holdings two years ago.
In a report discussed by the IMF board this week and released on July 31, the fund’s staff said 4.4 billion euros ($5.84 billion) of financing has yet to be identified next year under the rescue package it finances with the Eurozone. If Greece walks away from some of its public debt, the bill will have to be picked up by the taxpayers in the 16 other Eurozone countries.
In addition, a December commitment by Europeans to provide further debt relief for Greece may require agreeing to measures as early as 2014-2015, provided Greece meets its budget targets, the IMF staff said.
“If investors are not persuaded that the policy for dealing with the debt problem is credible, investment and growth will be unlikely to recover as programmed,” according to the report. “The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program.”
The IMF’s reminder to Europe comes as Greece’s financial fate has become entwined with German politics, with Chancellor Angela Merkel campaigning for a third term on the promise Germany won’t write off any of the loans made to Greece since the debt crisis broke out almost four years ago. Most of Greece’s debt is now held by the Europeans and the IMF after investors took part in the biggest debt restructuring in history last year.
Under the December agreement, the target is for Greek debt to fall to 124 percent of Gross Domestic Product in 2020, from a peak the fund now sees at 176 percent of GDP this year, but none of the previous targets have even been close to being met and are constantly revised.
“It’s not possible to speculate right now on what the actual amount will be, but it’s true our projection right now implies that there will be a need for some relief in order to get to 124 percent,” Poul Thomsen, the IMF mission chief to Greece, said, raising the specter that the lenders may yet have to give in and write off more of Greece’s debt which has been in a freefall for years.
According to the report, that relief could be equivalent to 4 percent of GDP in 2014-15, based on current projections. While budget tightening is advancing and the fund sees Greece’s economy returning to growth next year, IMF staff expressed worries about the “piecemeal implementation of structural reforms” in the country. A privatization program is behind schedule as is progress in liberalizing regulated professions, they said.
The fund’s board of directors earlier this week approved the release of 1.7 billion euros ($2.25 billion) under the second joint bailout with Europe, helping replenish the country’s coffers through the German elections in September. European creditor countries approved disbursement of a 2.5 billion-euro ($3.32 billion) installment last week.
The fund requires seeing a 12-month guarantee of Greece’s financing to continue its own lending. While that’s the case now, a gap will open in August 2014 and a response on how to fill it should be identified by the time Greece’s creditors do the next review of the program, according to the report.
“Awareness of the risks of the program going off track seems to be increasing and one cannot but notice an undertone of despair in staff’s repeated calls on the Greek and the euro-area authorities to stand by their commitments,” Paulo Nogueira Batista, who represents Brazil and 10 other countries on the IMF board, said in a statement prepared for the meeting. He said he abstained on the proposed measures this week, including the disbursement.
Poul Thomsen, the IMF’s mission chief in Greece, said he was confident the recession would end soon and that Eurozone countries would make good on their pledge to provide Greece with additional debt relief after Athens balances its state budget.
“I have no doubt we will see a bottoming out of recession next year, early next year. I am still confident,” Thomsen said. The IMF also predicted the bailout program would fall short of Greece’s needs by 4.4 billion euros ($5.84 billion) next year and by 6.5 billion euros ($8.63 billion) in 2015.
The IMF — describing the expected shortfall as a “test of European support” — said that finance ministers from the 17 euro countries have already begun discussions on plugging financing gaps.
The Greek government, meanwhile, said it was finalizing a credit system for its new transfer-and-firing mobility scheme in the public sector — taking qualifications, work assessment and experience, as well as family status and other “social factors” into account — to meet its target of firing 15,000 workers on the state payroll by the end of next year.
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