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IMF's Man in Athens: We Want More Cuts

Poul Thomsen, the IMF's mission chief in Athens, says he should have been tougher on Greece long ago

ATHENS – Greek workers, battered and bruised after repeated pay cuts, tax hikes, slashed pensions and the coming firing of 150,000 civil servants as a condition of getting international aid to keep the country’s economy will have to brace themselves for more of the same. Poul Thomsen, the International Monetary Fund’s (IMF) chief in Greece, said the institution, which, along with the European Union (EU) and European Central Bank (ECB) form the Troika providing Greece with a first bailout of $152 billion and beginning a second for $172 billion, said the loans would be cut off if Greece doesn’t meet ambitious fiscal targets.
Speaking to Greece’s SKAI TV, he said Greece – with an election pending later this spring to replace a hybrid government of PASOK Socialists and their bitter rival New Democracy Conservatives – can not let up or think aid is limitless. And, in an ominous note, he said more spending cuts in the public sector are almost certain. A Troika report recently said Greece must slash an additional $15.8 billion in public spending, despite more austerity measures piled on the second bailout, including reducing pensions and cutting the minimum wage 22-32 percent. The current temporary government headed by former ECB Vice-President Lucas Papademos supported those conditions although it earlier said the cuts wouldn’t be necessary.
“In order for the fiscal deficit to go down, the public sector has to shrink. It is time for taboos to go away,” Thomsen said, referring to closure of state corporations and the sacking of public workers. He said he should have been tougher sooner. “It was an error of mine that I did not put more pressure on more drastic cuts in expenditure,” said Thomsen. The first two years were “the phase of fiscal adjustment,” and from now on there can be no results in fiscal streamlining just by introducing “any more horizontal cuts in salaries and pensions, and new tax increases.” “The special assistance by the IMF to Greece has its limits,” he added, distancing the fund from a third support package should Greece require it. “If that happens, then there will be a problem,” warned Thomsen.
That’s bad news for whomever wins the election as New Democracy leader Antonis Samaras, the front runner, said he now opposes the austerity measures he supported before he opposed them and that he would try to renegotiate the terms that Thomsen said are not negotiable. Finance Minister Evangelos Venizelos is set to step down on March 18 after he’s slated to take over PASOK from former Prime Minister George Papandreou, who quit four months ago after repeated protests, riots and strikes against austerity. Venizelos has been a strong supporter of the harsh terms and doubled income and property taxes on Greeks and taxed the poor, which helped drive support for PASOK from 44 percent after it won in 2009 to 9-13 percent now.
The IMF last week approved the release of a $36.8 billion as its share of loans over the next four years for Greece, but the head of the Washington-based agency, Christine Lagarde, also warned Athens must persist with reforms. Lagarde praised the government but said further reforms and fiscal adjustment were needed. “Greece has made tremendous efforts to implement wide-ranging painful measures over the past two years,” she said. “Greece’s priority is to undertake competitiveness-enhancing structural reforms,” she said, adding however that “significant further fiscal adjustment is necessary to put debt on a sustainable downward trajectory.”
In a conference call from Washington, an IMF official said Greece’s debt to GDP ratio was projected to drop from 165 percent at the end of 2011 to 116.5 percent by 2020. At that time, Thomsen emphasized the importance of Greece implementing labor market reforms, moving away from collective labor contracts, to become more competitive although that will strip private sector workers of their rights and many have already seen their companies reducing their salaries as much as 25-50 percent. “Greece still faces a major competitiveness gap; if it doesn’t close this gap, it will continue to see a reduction in wages,” Thomsen said.
Thomsen said he hoped for an increase in tax collection but ruled out more tax hikes. The Troika said it has been continually disappointed by the failure of Greece to go after major tax evaders costing the country more than $60 billion. A recent crackdown led to the arrest of more than 100 alleged tax cheats but none have been prosecuted.
His deputy, Mark Flanagan, answering a question put to him by the Athens’ newspaper Kathimerini’s English Edition, said there were “problems at every step of the process.” Thomsen added: “It takes about 10 or 12 years to enforce tax collection, which is an eternity.”  He said the government had promised not to offer amnesties and they expected it to honor this.
Thomsen said the IMF would support Greece’s rescue effort as long as Athens stuck to its program. “There is clearly in there a strong signal that implementation has to improve compared to what we saw in 2011,” he added. Asked whether the IMF was comfortable that the rest of Europe was now insulated from the Greek crisis, Thomsen said: “There is a clear sense there is a much reduced risk but there is also a sense there is still risk.” He added that, “Greece’s problem is above all a competitiveness problem … and will require difficult structural reforms and this will undoubtedly be socially and politically challenging,” he added.
Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, said the IMF would not hesitate to cut off its financial lifeline to Greece if the government failed to meet its targets. “I would be very surprised if there wasn’t a strongly worded warning to Greece that unless we get a different tune here in terms of implementation we will cut off funding very quickly,” he said.

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