EC concerned over reform implementation

The European Commission is showing further concern over whether Athens can service its debt in the long run, according to a report published by the European Union’s executive branch on Saturday.

Athens will get a ?12 billion tranche of its existing ?110 billion rescue package by July 15, but its international creditors are now warning that paying down a debt of 160 percent of economic output will be a difficult balancing act.

“The Greek government debt will remain for many years at a high level and therefore subject to possible adverse developments that cannot be predicted,» the Commission?s fourth assessment report of the Greek fiscal adjustment program argued.

Especially lower-than-expected economic growth «would put the debt trajectory on a clearly unsustainable upward path,» the report said.

The Commission did recommend the disbursement of the fifth bailout tranche in the report, but warns that the success of the midterm fiscal plan depends on its decisive implementation.

The 173-page report stresses that there are significant risks regarding the implementation of the new measures, which, if not dealt with properly, would put in doubt the success of the program for the restoration of competitiveness and the sustainability of the debt.

In an illustration displaying several scenarios for Greece’s debt load, growth of just 1 percentage point below expectations would leave the debt around 170 percent of gross domestic product past 2020, with the graph pointing firmly upward.

“Solvency depends on the political and social conditions which allow or not the implementation of the required policies,» the Commission report cautions.

It points in particular to the key problems of the country?s public finances, placing more emphasis on the reduction of the excessive number of civil servants and improving the economic productivity of state corporations and the social benefits mechanism. These elements will be crucial for the success of the midterm fiscal plan, it maintains.

The report further warns that the delays seen in the processing of the midterm plan reflect the increasing difficulty the government has in phrasing and enforcing collectively the financial reforms required.

Brussels adds that the impact of the measures with a high risk in their implementation, which are hard to quantify, have not been factored in the first couple of years of the program (2011-13). They include the reduction of tax evasion and the abuse of social benefits.

As far as the privatization plan is concerned, the report says there are specific state assets identified for sale to the private sector and a preliminary timetable has been agreed. It notes that in order to accelerate the process and secure its continuation, a privatization fund will soon be created, administered by an independent and professional board. The creation of a new criterion of a quarterly quantity assessment of the whole privatization process will contribute in the monitoring of progress, the Commission underscores.

In what has been the most pessimistic of all four Brussels reports on Greece?s adjustment yet, there is also a call for the outlining of basic parameters for a new funding program for Greece, which is planned for negotiation in September.

The Commission reiterates its stand against the restructuring of the Greek debt, maintaining that the negative consequences would outweigh any gains from debt restructuring, but for the first time it contains a section on debt restructuring, including a scenario for a 40 percent haircut, a forced reduction in the value of Greek bonds.

A haircut to this effect would devastate Greek banks, wiping out the capital cushions and triggering a massive flight of deposits, the Commission warns. Restructuring Greece’s debt also risks «creating a permanent shift in investor sentiment and lead to self-fulfilling prophecies for other vulnerable member states.?

The cost of borrowing from the markets remains preventively high, Brussels adds, highlighting that the market skepticism is related to the doubts expressed about the Greek government?s as well as society?s ability to achieve fiscal stability and restore competitiveness.

The report finally notes that Greece’s destiny will likely be decided by what happens within the country as well as by outside conditions it has little influence over, such as global economic growth that would provide it with a better market for exports.