IMF says Greek debt ‘highly unsustainable,’ debt relief ‘essential’

IMF says Greek debt ‘highly unsustainable,’ debt relief ‘essential’

The International Monetary Fund wants Greece’s European partners to grant Athens substantial relief on its debt which it sees remaining "highly unsustainable," according to a draft IMF memorandum seen by Reuters.

Earlier on Tuesday, Greece and inspectors from its EU/IMF lenders adjourned talks on a crucial bailout review, mainly due to a rift among the lenders over a projected fiscal gap by 2018 and over Athens’ resistance to unpopular reforms.

They will resume the review after this week’s IMF spring meetings in Washington, where the lenders are also expected to discuss Greek reforms and debt.,

Greek Finance Minister Euclid Tsakalotos and German Finance Minister Wolfgang Schaeuble, who told Reuters on Tuesday that he saw no need for debt restructuring, will also be there.

"Despite generous concessional official financing and further reform plans … debt dynamics are projected to remain highly unsustainable," the IMF draft said. "To restore debt sustainability, in addition to our reform efforts, decisive action by our European partners to grant further official debt relief will be essential."

EU institutions expect Greece to have a fiscal shorfall equivalent to 3 percent of economic output in 2018, while the IMF projects a 4.5 percent shortfall.

The EU institutions also believe Athens can reach a primary surplus – the budget balance before debt-servicing costs – of 3.5 percent of GDP by 2018, as targeted in its latest financial bailout.

But the IMF’s draft Memorandum of Financial and Economic Policies (MFEP), which is compiled during the review, projected a primary deficit of 0.5 percent this year, a surplus of 0.25 percent in 2017 and a primary surplus of just 1.5 percent in 2018.

It said these figures reflected reform fatigue after five years of adjustments and social pressures in Greece due to high unemployment, which rose to 24.4 percent in January.

The draft projected an average rate of economic growth of 1.25 percent for the long term, which is lower than its previous forecast.

The targets, which it called "ambitious, yet realistic," could be underpinned by implementing measures that would save the equivalent of 2.5 percent of GDP by 2018, including reforms to its pension system, income tax, value-added tax and the public sector wage bill.

Pension reforms mentioned in the IMF memorandum include the phasing out of a benefit for poor pensioners (EKAS), changing the contribution base from notional to actual incomes for the self-employed, recalculating pensions and introducing a national pension of 345 euros/month after 15 years of contributions and 384 euros/month after 20 years of contributions.

To tackle further pension fund deficits, Greece should implement measures worth another 0.5 percent of GDP but without including any more cuts to its main pensions which would be frozen by law, the IMF said.

Greece’s leftist government, which was re-elected in September on promises to mitigate the negative impact of austerity and has a fragile parliamentary majority, does not want to hurt the country’s 2.7 million pensioners any more, having seen their monthly stipends cut 11 times since 2010.

Readjusting tax income brackets and lowering the tax-free threshold was also among the measures under discussion.

Greece and the lenders are discussing the liberalisation of the loan market as part of measures to reduce the volume of non-performing loans. Athens would amend its legislation to allow the sale of non-performing and performing bank loans by non-banks "freely and immediately," the draft said.

The legislation related to these measures should be passed before 2017 and implemented gradually, the IMF said. Athens will probably also need to submit a supplementary budget this year, it added.

Athens said on Tuesday it would submit pension and income tax legislation to parliament next week.


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