IMF Says Greece May Need More Help Still

ATHENS – With fresh rescue money ready to flow into Greece as part of another international rescue package, lenders are fretful that the country will return to its profligate ways and need yet another bailout, and said they will carefully monitor progress on reforms, especially after the upcoming election to choose a new government.
Greece is surviving on a first series of $152 billion in loans from the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) Troika, which is ready to dispense another $172 billion after more austerity measures were agreed upon, as well as the successful negotiation of a write down of $134 billion in debt with lenders who were forced to take 74 percent losses on their investments.
But IMF officials said Greece remains “accident prone,” another indication of lingering mistrust in the ability of the country’s leaders to stick to promises of reforms, and that more aid may yet be needed. The Washington-based agency said the second bailout was predicated on ambitious fiscal and privatization targets, none of which the country has previously been able to meet.
Polls are expected to be held late in April or early May to choose a government to replace the hybrid administration of PASOK Socialists and their bitter rival New Democracy Conservatives presided over by interim Prime Minister Lucas Papademos, a former ECB Vice-President. Both PASOK and New Democracy have agreed to abide by the pay cuts, tax hikes, slashed pensions and coming firing of 150,000 workers as a condition of the aid, but both major parties are slipping badly in surveys to anti-bailout parties, raising the possibility of a badly fractured coalition government.
PASOK, which won in 2009 with 44 percent support, has fallen to fifth place with 11 percent and is set on March 18 to replace its leader, former Prime Minister George Papandreou, who resigned four months ago in the wake of constant protests, riots and strikes against austerity, with Finance Minister Evangelos Venizelos, who has doubled income and property taxes and taxed the poor, and said he would give up his post and lead the party to victory.
“In the event of slower progress in policy implementation, or failure of the economy to respond rapidly enough to reforms, completion of reviews may require additional support from Greece’s European partners on yet more concessional terms than currently envisaged, and-or another restructuring of bonded debt,” according to a new IMF report. The agency has just approved a $36.8 billion loan for Greece as part of its share of ongoing bailouts. {If the program goes off track, Greece’s capacity to meet its obligations to the fund would hinge critically on the willingness of European partners to continue to backstop Greece’s payments capacity and the Eurosystem’s capacity to backstop bank liquidity while further efforts are put in place to stabilize the Greek economy,” IMF staff warned.
The IMF estimates Greece’s financing needs to reach $216.7 billion through 2014 and to range from $10.5 billion to $27.6 billion for 2015 and the first quarter of 2016, depending on progress in restoring the country’s market access. Greece completed the world’s largest sovereign-debt restructuring and had to agree to deeper spending cuts to obtain the new funds as it faces a fifth year of recession. The new program also seeks to overhaul the country’s economy from public enterprises to the labor market to make it more competitive.
The government must continue to meet the conditions set by its international creditors to receive aid payments at three-month intervals. The IMF report said the new program was “subject to exceptional risks,” including the upcoming elections that create uncertainty over whether the measures will implemented. “The materialization of these risks would most likely require additional debt relief by the official sector and, short of that, lead to a sovereign default,” it wrote. “In the absence of continued official support and access to” refinancing by the European Central Bank, “a disorderly euro exit would be unavoidable.”
Greece was notified on March 16 that it would receive the first tranche of its new bailout on Monday, $7.7 billion, as lenders amped up pressure on the government to ensure that the upcoming elections do not lead to the pace of reforms slowing or fiscal targets being missed. Matthias Mors, the European Commission’s representative on the troika, which also includes the European Central Bank and the International Monetary Fund, announced that following the IMF’s approval of its participation in the bailout, the first installment of the $172-billion bailout would be paid on March 19. Mors made the announcement as he presented a report by the troika, which stressed that the implementation of the program is by no means guaranteed and that its success “depends chiefly on Greece.” The report added: “It crucially hinges on the full and timely implementation of fiscal consolidation and growth-enhancing structural reforms agreed under the program.”
He said that the general elections could result in the program being delayed or derailed, depending on the government that results, largely expected to be a shaky coalition. “Of course there are significant implementation risks,” he said. “We still have a huge budget deficit, we still have a huge current account deficit.” He said that Greece would have to take further steps to improve its competitiveness, including additional reductions to labor costs, an ominous sign for private sector workers that their wages are likely to be cut, perhaps by 30 percent or more. Mors said that significant cuts had been made but “perhaps we are only at the halfway point.”
He said that it would be possible for the new government to make adjustments to the program. “Every quarter there has to be a set of adjustments to the program, each time there is a new memorandum,” he said. “It is possible that there will be modifications to the memorandum after the elections. What’s important is that the basis, the objectives, the policies remain the same.”
Sources told Kathimerini that the IMF’s permanent representative in Athens, Bob Traa, spoke to Finance Ministry officials to stress the importance of Greece sticking to the program and preparing the ground for the next set of measures that will have to be agreed upon with the Troika in June. At that point, Athens will have to finalize measures designed to save more than $14.4 billion during 2013 and 2014.
(Sources: Bloomberg, Kathimerini)