Greece will need to make an “extra effort” to cut its 2011 budget deficit enough to keep receiving emergency aid, European Union and International Monetary Fund officials said.
“A revenue shortage has been offset by more spending cuts at the state level,” Poul Thomsen, head of the IMF’s Greece mission, said at a press conference in Athens today. “This is not sustainable long-term. Deep structural reforms are needed” to boost tax revenue and make state spending and agencies more efficient, he said.
Greece’s struggles to cut the deficit are casting doubt over its ability to repay on time the 110 billion euros ($149 billion) in loans pledged by the EU and IMF earlier this year. Greece has vowed to trim the shortfall to 7.4 percent of gross domestic product in 2011 from 9.4 percent this year, though its efforts have been complicated by slower-than-forecast revenue growth and an EU data revision that boosted the deficit and debt levels through this year, EU and IMF officials said at the news conference.
The officials, who reviewed Greece’s progress, cited a 7.5 percent deficit target for 2011 in a joint statement today.
Greece tapped the EU-IMF loans after concern about the deficit pushed its borrowing costs to record highs, leaving it virtually shut out of financial markets. Fallout from Greece’s debt crisis sent the euro to a four-year low in June and led to a surge in bond yields of other high-deficit euro-region countries as investors shunned their debt.
Return to Markets
Greece is likely to qualify for the next tranche of loans and should be able to start selling bonds again, Thomsen said. Finance Minister George Papaconstantinou said earlier this month that Greece plans to return to international markets in 2011.
“We are confident Greece will be able to return to the market during the program period,” Thomsen said. If more funds are needed options will be examined including extending the EU-IMF loan repayment period or a “follow-up loan,” he said.
The cost and loss of confidence from any debt restructuring would “far outweigh” any benefit, Thomsen said. Prime Minister George Papandreou said last week that a restructuring is out of the questions, according to an interview in Le Figaro.
The November review was conducted before the EU and IMF approve the release next month of a third payment of 9 billion euros to Greece. Next month, the IMF is due to decide on its 2.5 billion-euro portion and make the payment, while euro-region countries are expected to sign off on the release of their 6.5 billion-euro share at a meeting of finance ministers. The second installment was received in September.
Greece agreed to adopt additional measures in its 2011 budget amounting to 2.5 percent of GDP and further steps will be outlined for 2012-2014, Servas Deroose, deputy director general of the European Commission’s economic and financial affairs department, said today in Athens. The extra measures will center on health-care and state-enterprise reform, he said.
Greece’s economy is expected to “begin turning around” in 2011, according to the EU-IMF statement. The economy is forecast to shrink 4.2 percent this year and 3 percent in 2011, deeper contractions than forecast in May.