June 7 (Bloomberg) -- Greece’s government faces headwinds in its deficit-cutting efforts and must keep up the pace of change to prevent its program from faltering, an International Monetary Fund official said.
“It is clear Greece is at a critical point,” Bob Traa, the head of the IMF mission in Greece, said at a conference in Athens today. “The choice is between bold reform or to allow the pace of reforms to slow. The headwinds are difficult for Greece right now.”
Prime Minister George Papandreou is struggling to win support from his party and Greeks for 78 billion euros ($114 billion) in new austerity measures and asset sales through 2015 to secure a 12 billion-euro bailout payment and meet conditions for receiving an additional rescue package. The package includes “significant” cuts in public-sector employment, 50 billion euros in state asset sales and fewer tax exemptions.
Without deeper reductions, the country’s budget shortfall will remain stuck at between 9 percent and 10 percent of gross domestic product, Traa said. State asset sales will begin “without delay” and Greek banks need to bolster their capital buffers, he said.
“As long as doubts exist about the assets held by the banks, wholesale market access will likely remain impaired and in this regard, larger capital cushions will help to reduce these doubts,” Traa said. “Financial-sector stability plays a crucial role in this recovery. They have to support financial stability and banks must do their part. In particular, banks should seek further capital and improve the market’s perception of their valuation.”
A year after the bailout that aimed to stop the spread of the debt crisis, Greece remains mired in a third year of recession, shut out of financial markets and saddled with the biggest debt load in the euro’s history. Greece now needs a second rescue package to avoid the euro area’s first sovereign default.
The Washington-based IMF provided 30 billion euros of Greece’s original loan bailout of 110 billion euros.
Papandreou’s 6.4 billion euros of spending cuts this year, and another 22 billion euros up to 2015 aim to get the deficit down to 7.5 percent of GDP in 2011 and about 1 percent in 2015. The economy is forecast to shrink 3.5 percent this year after contracting 4.4 percent last year.
--Editors: Jennifer M. Freedman, Alan Crawford
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