The International Monetary Fund attempted to focus Greek and European minds on Wednesday as it argued that Greece faces an 11-billion-euro funding gap and will need further debt relief, while warning Athens that a failure to overhaul its public sector will force the government to adopt more austerity measures.
In its 207-page report of the fourth review of the Greek adjustment program, the Washington-based fund raised serious questions about the scheme’s sustainability. IMF staff, led by the Fund’s representative in the troika, Poul Thomsen, suggested that Greece will need another 4.4 billion euros in financing next year and 6.5 billion euros in 2015.
Thomsen insisted the Greek economy would grow next year. “The exact timing is where the uncertainty comes,” he said, adding that lower-than-expected growth or a failure to meet revised privatization targets could lead to Athens requiring even more funding than the IMF has identified.
In recent months the eurozone has deflected any talk of a Greek funding gap as it insists the program is fully funded until next summer. The IMF’s executive board agreed on Monday to release another 1.7 billion euros in loans to Greece, taking its total contribution to the bailout to 28.4 billion euros. However, the IMF rules mean it cannot continue to fund the Greek bailout unless it is convinced that the country is fully financed for the next 12 months.
The Fund presented Greece’s European partners with another dilemma when it again raised the issue of debt relief, another matter that the eurozone has tried to keep a lid on, especially in the runup to German federal elections in September.
The IMF report suggested that Greece would need a debt reduction equivalent to 4 percent of its gross domestic product, or some 7.4 billion euros, between 2014 and 2015 in order for its debt to become sustainable. The Fund urged the eurozone to confront the issue sooner rather than later.
“Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed,” it said.
At least one of the 24 IMF executive directors refused to approve the release of more funding for Greece. Paulo Nogueira Batista, who represents Brazil and 10 other member countries, said he doubted forecasts about Greece’s debt and economic growth, labeling them a “delusion.” Batista suggested there was a real danger the IMF might not get its money back from Greece and that the country had been pushed to the edge by its demanding consolidation program. “The widespread perception that the hardship brought on by draconian adjustment policies is not paying off in any way has further undermined public support for the adjustment and reform program,” he said.
Nevertheless, the IMF’s report praised Greece for its fiscal efforts and urged it to step up its reform drive. “The fiscal adjustment remains exceptional by any international standard,” said the Fund. But it expressed concern about civil service reform, fearing that the focus is “shifting significantly away from ensuring the exit of redundant and unqualified staff to relocation of such staff within the public sector.”
It also emphasized the need for Greece to improve its tax collection. “Unless the authorities tackle the problems of revenue administration with much greater urgency in coming months, a credible 2014 budget would again need to be centered on painful expenditure cuts,” Thomsen told reporters.