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IMF Approves 28 Billion-Euro Greek Loan Warning on Slippage

March 15, 2012

The International Monetary Fund approved a 28 billion-euro ($36.6 billion) loan for Greece as part of a second bailout led by euro area governments that requires more austerity and an overhaul of its economy from public enterprises to the labor market.

The Washington-based IMF said 1.65 billion euros will be immediately available under the new arrangement. The four-year loan follows an earlier program that was canceled, which left 9.7 billion euros that were never disbursed.

Greece completed the world’s largest sovereign-debt restructuring and had to agree to deeper spending cuts to obtain the new funds. While private creditors’ participation helped decrease the projected debt level, the IMF warned today that the country now has “no room for slippages” and needs to focus on measures that will boost its competitiveness.

“The challenges confronting Greece remain significant, with a large competitiveness gap, a high level of public debt, and an undercapitalized banking system,” IMF Managing Director Christine Lagarde said in an e-mailed statement. “The new Fund- supported program will enable Greece to address these challenges while remaining in the Eurozone.”

The IMF now sees Greece’s debt reaching 116.5 percent of gross domestic product by 2020, lower than the 120.5 percent previously forecast, because of greater participation by the private sector in the debt restructuring.

Buying Time

While the conditions attached to the loan may prove hard to meet amid a fifth year of recession and elections that may occur within weeks, European officials are counting on their 130 billion-euro package to buy time to insulate the rest of the region from the debt crisis, said Domenico Lombardi, a senior fellow at the Brookings Institution in Washington.

“The main function of this agreement is to contain the crisis for the next few months in order to provide a more stable environment for Italy and Spain to carry out their adjustments and therefore stabilize the euro area as a whole,” said Lombardi, a former IMF board official.

The package, formally approved by euro countries yesterday, caps months of negotiations over the second bailout after an initial rescue in 2010 failed to halt the debt turmoil.

With only about 18.3 billion euros in fresh money, the IMF is lowering its share of the bailout compared with the first package, amid concern from member countries including Brazil that Greece accounts for too much of total IMF commitments.

Additional Cuts

Greece had to spell out 3.2 billion euros in additional spending cuts this year to obtain aid, and the latest round of measures have provoked street protests in Athens as unemployment tops 20 percent. Steps to be taken include lowering pension payments, cutting funding for municipalities and firing as many as 15,000 state workers.

“Greece’s problems above all are competitiveness problems,” Poul Thomsen, the IMF mission chief to Greece, said on a conference call. It will have to “deal with this through the means of internal devaluation.”

Reforms to the economy must include liberalizing collective bargaining agreements, Thomson said. Some public enterprises should be closed and the number of public-sector employees reduced “steadily.”

Elections in April or May might still derail adherence to the measures demanded. Under the terms of the bailout, the Greek government must continue to meet the conditions set by its international creditors to receive aid payments at three-monthly intervals.

No ‘Great Illusions’

“Nobody has great illusions on the feasibility of the program,” said Laurence Boone, chief European economist at Bank of America Merrill Lynch in London. “There’s a feeling they will default again,” this time on its obligations to its public creditors, because of the scale of efforts asked of Greece, she said.

Frustrated with Greece’s inability to meet deficit-cutting and asset-sale targets for two years, donor countries have also insisted on more control over how Greece spends the money. A special account will be set up that gives priority to keeping Greece solvent before releasing money for the country’s budget.

“The main risk to the program is on a delay in structural reforms” needed to boost growth and offset the impact of fiscal austerity, Thomsen said. “There are no more low-hanging fruits, no more easy adjustments.”

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

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