EU IMF clear rescue funds for Greece

November 23, 2010
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, ATHENS, Nov 23 – EU and IMF auditors cleared a new slice of rescue funding for Greece on Tuesday but demanded more austerity action while acknowledging that the country faced potential strains in repaying on time.

The EU-IMF mission demanded further action to broaden taxes, cut spending, particularly on health care, and to tighten up at state companies.

The expert from the International Monetary Fund, Poul Thomsen, commenting on the outcome of the audit of radical reforms imposed under the rescue in May, said: "The programme is at a crossroad."

The approval for the third tranche of funding had been delayed by a day because negotiations on further measures, described as "difficult" by the Greek side, were continuing, just as the European Union was putting in place a rescue for Ireland, the second eurozone crisis in six months.

The auditors, saying that Greece was "largely on track" with reforms to correct its public finances, approved the release in December of a third instalment of rescue funds totalling 9.0 billion euros (12.2 billion dollars).

The fourth slice of 15 billion euros due by March would depend on progress made with the latest requested measures to tame the budget deficit and national debt.

The auditors, speaking after a review of Greek public finances following a 110-billion-euro (150-billion-dollar) May rescue, did not rule out extending the repayment timetable nor providing a further loan to Athens.

The Greek government was determined to move on structural reforms, Thomsen said. "We are largely on track, with small deviations, we are close to targets."

He said that "the main risks are linked with the possibility that reforms are delayed."

He added: This is the key question."

For the European Commission, Servaas Deroose said: "Reforms have to be done in the labour market in order to restore competitiveness."

Wages in Greece had doubled between 2000 and 2008, he said. "It\’s an excessive evolution."

The auditors from the IMF, EU Commission and European Central bank, said in a joint statement: "New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of health spending, which is inefficient relative to other eurozone countries."

The statement also said that action was needed on "state enterprises, which are a heavy burden on the economy with perennial losses for Greek taxpayers."

The government also had to push on with reforms of tax administration for which new measures to strengthen tax compliance were coming into effect.

Asked whether the May package could be extended, Thomsen noted that the initial loan was for a relatively short time and that Greece should in due course be able to return to the markets to borrow funds.

"But whether it\’s going to be able (to repay the funds and service debt) is admittedly a question."

There were various options for dealing with the repayment issue, Thomsen said, adding: "We have options of allowing longer repayment periods or to give a follow up loan."

He said: "We are confident Greece will be able to return to the market before the end of the programme … We hope there is market access so that there is no problem to repay this 110 billion (euros)."

Greece was forced to appeal for help to avert a default in May largely because international investors had become so reluctant to lend to it that the cost of borrowing had risen to an unbearable level, of about 12 percent at one point. The Greek banking system is now heavily dependent on special cheap financing from the European Central Bank.

Financial analysts have expressed concern that Greece might have difficulty in repaying the rescue loan on time and eventually might have to restructure its debt, implying heavy losses for people who have bought its bonds but this risk is rejected by Greek and EU officials.

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