Greece is slipping on reforms, IMF warns
By Howard Schneider,
Greece’s international rescue program continues to slip as the nation’s leaders shirk promised changes, investors flee a beleaguered banking system and concern that Europe will fall into recession adds to the pressure, the International Monetary Fund said Tuesday in its latest report on the country.
Even as European leaders cope with a broader set of financial and political problems within the region, the IMF report highlighted how issues at the epicenter of the crisis are unresolved more than 18 months into a Greek rescue program that by now was supposed to be making some headway.
Instead, IMF Greece mission chief Poul Thomsen said that the Greek economy will shrink by about 6 percent this year — more than twice the rate expected when the three-year bailout was approved in May 2010 — and will continue contracting through 2012. When the initial $140 billion bailout was adopted, the IMF predicted that Greece would return to growth in 2012.
Thomsen cast the blame squarely on Greek officials’ slowness in carrying out their pledges to reform economic policy and government spending. Those politically painful steps involve selling off state enterprises, firing tens of thousands of politically connected state employees and removing jealously guarded protections that limit competition in dozens of professions.
Greek Prime Minister George Papandreou stepped down last month in deference to a new unity government that IMF officials feel needs more time to prove it is prepared to follow through on the bailout’s requirements. But the state of the country’s finances are as precarious as ever — and likely to spur further turmoil in European markets and politics.
An E.U. summit in Brussels last week made progress on long-term issues, as most members of the European Union — with the notable exception of Britain — agreed to forge a plan to strictly limit government spending and borrowing in order to save the euro. But the immediate need for a short-term fix has left markets on edge — reacting sharply to each national bond sale or bit of news — with little confidence that the euro zone’s most heavily indebted governments will be able to pay their bills. Greece has been at the forefront of the crisis since officials conceded in October 2009 that the country’s public debts were far greater than they had previously reported.
Negotiations are underway with banks and other private investors for a voluntary 50 percent reduction in Greece’s outstanding bonds. While the debt restructuring is considered crucial to stabilizing the country financially, it could prompt credit-rating agencies such as Standard & Poor’s to declare Greece in default, leaving uncertain consequences for other countries seen as potentially in need of debt relief.
A failure in the talks, however, could be worse if Greece deliberately withholds bond payments and forces losses on its debtors — or decides to quit the euro zone to escape its massive obligations.
The IMF said there was a “real risk” that a voluntary debt restructuring won’t contribute enough savings to sustain Greece financially. That would leave E.U. members with the prospect of lending the country more money and the IMF with the difficult choice of whether to remain involved in a program that can’t stay on track.
“Reforms have fallen short. They are well behind schedule. They are well away from the critical mass that would make people conclude Greece is doing business in a fundamentally different way, and that is the main reason the bottoming out of the recession has not happened,” Thomsen said in a conference call from Athens. “It does not mean we are not making progress, and it is not a reason to give up.”
Talks between private investors and Greek, European and IMF officials are underway in Athens and Paris. The hope is for “substantial progress” toward finishing the private debt restructuring, said an official at the Institute of International Finance, a trade group that is leading the talks for private bondholders.
The goal is to cut about $100 billion from the face value of Greece’s outstanding bonds, greatly easing the amount of cash the country will need in coming years to meet interest payments and retire maturing debt.
Success would pave the way for renewing the three-year bailout program with additional funding from Europe and presumably from the IMF.
But a breakdown in the private talks could leave the Greek rescue program in tatters — and the country making a disorderly exit from the euro zone.
The IMF said it is willing to remain engaged and recently approved the latest payment under the existing bailout.