Greece will probably need more money and debt relief from European countries in order to meet the objectives of its bailout program, according to a report by the International Monetary Fund staff.
In a report discussed by the IMF board this week and released today, the fund’s staff said 4.4 billion euros ($5.8 billion) of financing has yet to be identified next year under the rescue package it finances with euro-area nations. In addition, a December commitment by Europeans to provide further debt relief for Greece may require agreeing to measures as early as 2014-2015, provided Greece meets its budget targets, the IMF staff said.
“If investors are not persuaded that the policy for dealing with the debt problem is credible, investment and growth will be unlikely to recover as programmed,” according to the report. “The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program.”
The IMF’s reminder to Europe comes as Greece’s financial fate has become entwined with German politics, with Chancellor Angela Merkel campaigning for a third term on the promise Germany won’t write off any of the loans made to Greece since the debt crisis broke out almost four years ago. Most of Greece’s debt is now held by the Europeans and the IMF after investors took part in the biggest debt restructuring in history last year.
Under the December agreement, the target is for Greek debt to fall to 124 percent of gross domestic product in 2020, from a peak the fund now sees at 176 percent of GDP this year.
“It’s not possible to speculate right now on what the actual amount will be, but it’s true our projection right now implies that there will be a need for some relief in order to get to 124 percent,” Poul Thomsen, the IMF mission chief to Greece, said on a conference call yesterday.
According to the report, that relief could be equivalent to 4 percent of GDP in 2014-15, based on current projections.
While budget tightening is advancing and the fund sees Greece’s economy returning to growth next year, IMF staff expressed worries about the “piecemeal implementation of structural reforms” in the country. In particular, a privatization program is behind schedule and so is progress in liberalizing regulated professions, they said.
The fund’s board of directors earlier this week approved the release of 1.7 billion euros under the second joint bailout with Europe, helping replenish the country’s coffers through the German elections in September. European creditor countries approved disbursement of a 2.5 billion-euro tranche last week.
The fund requires seeing a 12-month guarantee of Greece’s financing to continue its own lending. While that’s the case now, a gap will open in August 2014 and a response on how to fill it should be identified by the time Greece’s creditors do the next review of the program, according to the report.
“Awareness of the risks of the program going off track seems to be increasing and one cannot but notice an undertone of despair in staff’s repeated calls on the Greek and the euro-area authorities to stand by their commitments,” Paulo Nogueira Batista, who represents Brazil and 10 other countries on the IMF board, said in a statement prepared for the meeting. He said he abstained on the proposed measures this week, including the disbursement.