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IMF: Greek Debt Is 'Highly Unsustainable'

imfThe International Monetary Fund urges European creditors to offer Greece substantial debt relief because the country’s debt is “highly unsustainable,” according to Reuters.
The report cites a draft memorandum seen by Reuters. It refers to differences among Greece’s lenders — the IMF and the European Union institutions, namely, the European Central bank, European Stability Mechanism and European Commission.
The rift is over the 2018 fiscal gap and Greece’s unwillingness to implement unpopular reforms. The negotiations between Greece and lenders adjourned abruptly early Tuesday morning, to resume on Monday, April 18, after the IMF spring meetings in Washington DC.
The IMF draft says, inter alia, “Despite generous concessional official financing and further reform plans … debt dynamics are projected to remain highly unsustainable… To restore debt sustainability, in addition to our reform efforts, decisive action by our European partners to grant further official debt relief will be essential.”
EU institutions expect Greece to have a fiscal shortfall equivalent to 3 percent of economic output in 2018, while the IMF projects a 4.5 percent shortfall, the Reuters report continues.
The EU institutions also believe Athens can reach a primary surplus of 3.5 percent of GDP by 2018. But the IMF’s draft Memorandum of Financial and Economic Policies (MFEP), which is compiled during the review, projected a primary deficit of 0.5 percent this year, a surplus of 0.25 percent in 2017 and a primary surplus of 1.5 percent in 2018.
IMF said these figures reflected reform fatigue after five years of adjustments and social pressures in Greece due to high unemployment, which rose to 24.4 percent in January. The draft projected an average rate of economic growth of 1.25 percent for the long term, which is lower than its previous forecast.
The targets, which the fund considers “ambitious, yet realistic,” could be underpinned by implementing measures that would save the equivalent of 2.5 percent of GDP by 2018, including reforms to its pension system, income tax, value-added tax and the public sector wage bill.
Pension reforms mentioned in the IMF memorandum include the phasing out of a subsidy for poor pensioners (EKAS), changing the contribution base from notional to actual incomes for the self-employed, recalculating pensions and introducing a national pension of 345 euros/month after 15 years of contributions and 384 euros/month after 20 years of contributions.
To tackle further pension fund deficits, Greece should implement measures worth another 0.5 percent of GDP but without including any more cuts to its main pensions which would be frozen by law, the IMF said.
The Greek government does not want to hurt the country’s 2.7 million pensioners any more, having seen their monthly stipends cut 11 times since 2010.
Readjusting tax income brackets and lowering the tax-free threshold was also among the measures under discussion.
Greece and lenders are also discussing the liberalization of the loan market as part of measures to reduce the volume of non-performing loans. Athens would amend its legislation to allow the sale of non-performing and performing bank loans by non-banks “freely and immediately,” the draft said.
The legislation related to these measures should be passed before 2017 and implemented gradually, the IMF said. Athens will probably also need to submit a supplementary budget this year, it added.
The Greek government said on Tuesday it would submit pension and income tax legislation to parliament next week.

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