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Greece Has ‘Little Scope for Deviation’ in Program, IMF Says

July 13, 2011

(Updates with comments on aid from mission chief Poul Thomsen in seventh paragraph. See EXT4 <GO> for more on Europe’s sovereign-debt crisis.)

July 13 (Bloomberg) -- Greece has little margin for error in implementing the budget cuts and asset sales attached to its 110 billion-euro ($156 billion) bailout, the International Monetary Fund’s staff said.

In an appraisal of Greece’s policies under the joint rescue plan with the European Union, the IMF said that exceptional liquidity support from the European Central Bank is “critical.” European policy makers need to decide how to provide additional funding for Greece, the staff said.

“The debt dynamics show little scope for deviation,” the IMF staff wrote. “Incomplete fiscal adjustment, privatization shortfalls, or delays in structural reform implementation -- producing a considerably slower economic recovery and fiscal adjustment -- would see debt remain at very high and likely unsustainable levels through 2020.”

European finance chiefs haven’t yet agreed on how to reduce Greece’s debt burden, floating ideas this week from bond buybacks to a temporary default as they sought to shift a strategy that has failed to contain the debt crisis. There are also doubts about whether Greece will be able to complete its privatization program.

The country’s deputy finance minister yesterday said Greece won’t manage to sell everything on the list of planned state- asset sales and real-estate developments. He was later corrected by the government’s spokesman who said the program would be fully implemented.

International Markets

While the IMF acknowledges Greece cannot return to international markets next year as initially planned because of soaring borrowing costs, the fund’s chief Christine Lagarde told reporters this week that the IMF is not yet discussing details of a second bailout package and that “nothing should be taken for granted.”

While there’s been no request for a new aid package, the IMF is thinking about what the financing needs may be and what its contribution may amount to, Poul Thomsen, the mission chief to Greece, said on a conference call with reporters today. That is linked to what financing is provided by Europe and by the private sector, he said.

The IMF said the debate over the new financing, with uncertainties on how the private sector would contribute, hasn’t helped Greece and its banks, with deposit outflows picking up.

Greek Support

“It will be important for euro-area member states to decide how they fundamentally wish to support Greece, and then put in place the mechanisms needed to deliver this support,” the report said. “Comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing.”

Given the impact of private-sector involvement on Greece’s credit rating, euro-area member states need to put in place mechanisms to guarantee liquidity support to Greece’s banking system, it said.

Banks will face liquidity pressure throughout 2011 and will likely need additional capital, according to the IMF, which also urged the ECB to clarify that exceptional support will remain in place for the Mediterranean country.

“ To manage near-term liquidity risks, expeditious approval by the ECB’s Governing Council of the use of new government-guaranteed bonds would be very helpful,” IMF staff wrote. “The Bank of Greece must also be prepared to utilize its whole toolkit of options,” including Emergency Liquidity Assistance, a short-term loan program by national central banks in use in Ireland.

--With assistance by Gabi Thesing in London. Editors: Kevin Costelloe, Carlos Torres

To contact the reporters on this story: Sandrine Rastello in Washington at Maria Petrakis in Athens at

To contact the editor responsible for this story: Christopher Wellisz at

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