Greece won approval from the International Monetary Fund for a 3.2 billion-euro ($4.6 billion) payment under a joint loan with the European Union, buying policy makers time to craft a second rescue package and avert the first sovereign default in the euro region.
Greek commitments made to secure the loan are “delivering important results,” IMF Managing Director Christine Lagarde said yesterday in statement from Washington. Still, “a durable fiscal adjustment is needed, lest the deficit get entrenched at an unsustainably high level, and productivity-enhancing reforms should be accelerated, lest growth fail to recover.”
The decision follows last week’s authorization by European finance ministers to unblock 8.7 billion euros as talks continue on how to include banks and insurers in a new package for Greece, which can’t return to international financial markets next year because of surging borrowing costs. The option of involving the private sector has been criticized by the European Central Bank because it could trigger a partial default.
“Greece’s debt sustainability hinges critically on timely and vigorous implementation of the adjustment program, with no margin for slippage, and continued support from European partners and private sector involvement,” Lagarde said.
The IMF, whose loan to Greece under the initial joint 110-billion-euro package is the second-highest in fund history, hasn’t publicly discussed its participation in a second bailout.
Instead officials such as John Lipsky, acting managing director until Lagarde took the helm this week, focused on the measures needed for the disbursement approved yesterday. That included sale of government assets and assurances that the financing gap left by Greece’s inability to return to markets next year will be filled.
The Greek parliament’s passage of new budget cuts last week gave euro-area governments political cover to release the funds.
Prospects for turning the savings legislation into reality are clouded by a lack of opposition support and public hostility that boiled over into battles between rioters and teargas-spraying police outside the parliament in Athens last week.
Lagarde said the government’s plan to sell 50 billion euros of assets by 2015 is a “critical step” in reducing debt and spurring growth.
While the target “is very ambitious, the establishment of an independent privatization agency should help realize transparent and timely implementation,” she said.
Greece secured a bailout package in May 2010, seven months after the country raised its budget-deficit estimate to almost 13 percent of gross domestic product, three times higher than earlier forecast and four times the EU ceiling. Investor concern about Greece’s ability to repay its debt has roiled markets and caused contagion in other euro-area countries, forcing Ireland and Portugal into seeking rescues as well.
Greek debt, already at a European record of 142.8 percent of gross domestic product, is set to rise to 166.1 percent next year, the EU forecasts. The effort to cut a budget deficit that is about 10 percent of GDP has deepened a third year of recession.
The twin disbursements will help Greece roll over about 4 billion euros of bills maturing July 15 to July 22, plus about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test looms Aug. 20 when 6.6 billion euros of bonds come due.
Greece, said by the IMF to be “on track” in February, veered off course in April with the disclosure of a higher-than-planned 2010 deficit, forcing Prime Minister George Papandreou’s government to wring extra savings out of this year’s budget.
Sandrine Rastello in Washington at +1-202-654-4318 or email@example.com