Although the IMF recently agreed to lend the nation more money under the terms of an initial emergency loan program established last year, the latest staff review harbored no illusions that a crisis that has roiled world markets for 18 months will end anytime soon.
Greece’s debt is expected to peak at 172 percent of its annual economic output, substantially higher than the 150 percent of gross domestic product estimated when the joint IMF-European Union rescue was approved last year.
Debts higher than 100 percent of GDP are considered a rough benchmark that countries might face trouble; the treaty that established the euro as a main European currency stipulated that nations keep their debts no higher than 60 percent of GDP.
Although Greece’s recently approved economic program aims to bring down the level in coming years, the IMF report said that even small variations in the timing or success of the program’s initiatives mean that the debt could continue to climb.
“Full and timely program implementation is absolutely critical,” the report noted. “Incomplete fiscal adjustment, privatization shortfalls or delays in structural reform implementation . . . would see debt remain at very high and likely unsustainable levels.”
Moreover, the program hinges on renewed growth in the Greek economy as well as continued belt-tightening to produce an annual government surplus of about 6.5 percent of economic output — a figure the IMF report acknowledges as “at the very high end of international experience.”
“There is no room for slippage. There is no room for underperformance,” IMF Greek Mission Chief Poul Thomsen said in a conference call.
Thomsen said he thinks the program will make Greece’s economy more competitive, and he credited the government in Athens for largely meeting the budget-cutting and other goals set for it last year.
However, key parts of the program have fallen behind schedule, and the IMF and other European countries pressured Prime Minister George Papandreou to accelerate his government’s sell-off of state assets and money-losing government-owned companies, and to recommit to an aggressive program of economic reform.
But the IMF view of where Greece stands adds urgency to ongoing crisis talks in Europe, particularly negotiations among private bondholders over an out-and-out reduction of the more than $400 billion Greece owes.
Some analysts argue that a “haircut” agreed upon by banks and other major private investors is Greece’s only way to long-term economic stability, and that, if handled properly, it could be accomplished without causing larger problems in the European economy. The IMF, in its first clear projections on the issue, included about $45 billion of “private-sector involvement” in its analysis of whether Greece’s debt load could be made sustainable.
Others, including the European Central Bank, fear that a private-sector contribution — which might also be construed as a default by Greece, a first-ever occurrence among the 17 nations that share the euro — could trigger deeper problems in other highly indebted euro zone countries such as Italy and Spain. Given the size of those economies and their connections worldwide, that in turn could touch off a broader lending freeze — and associated economic downturn — of the sort that followed the collapse of Lehman Bros. in 2008.
According to the IMF’s latest estimate, the Greek economy will contract by 3.75 percentage points this year — steeper than the contraction of three percentage points the agency forecast in March. And its return to growth will be less than expected: The IMF expects the Greek economy to grow about 0.6 percentage points in 2012 compared with a March estimate of 1.1 percentage points.