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IMF says Greece still at long-term risk despite bailout deal

Thursday, May 26, 2016 - 06:37
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A breakthrough European Union agreement on Wednesday to release fresh bailout funds to Greece averted the threat of a massive default on its debt in coming months.

[WASHINGTON] A breakthrough European Union agreement on Wednesday to release fresh bailout funds to Greece averted the threat of a massive default on its debt in coming months.

But the International Monetary Fund - seen as a crucial partner to the eurozone country's bailout - faulted the deal saying official EU creditors had still not spelled out long-term debt relief indispensable to strengthen Greece's finances.

Hours after eurozone finance ministers announced that they would unlock 10.3 billion euros (S$15.8 billion) in bailout cash that Greece needs for looming bond payments, the IMF said it could not add its funds to the bailout as long as its demand for a detailed debt-relief plan had not been met.

European officials cheered the agreement reached after late-night talks as a breakthrough toward reviving the Greek economy, and claimed the IMF had agreed to join in with its own loans by the end of this year.

"The crisis between Greece and the eurozone is over and behind us," French Finance Minister Michel Sapin told a cabinet meeting in Paris on Wednesday.

"By this, any liquidity crisis is excluded for the next months," said German Finance Minister Wolfgang Schaeuble.

But the IMF confirmed critics who said the Eurogroup, which represents Greece and the other 18 countries that use the euro, had just "kicked the can down the road," saying it had not received sufficient assurances that European creditors will deliver on much-needed debt relief.

"Greece is in a situation where it needs a disbursement, and so we were certainly willing to concede on some points," a senior IMF official, speaking on condition of anonymity, told journalists hours after the talks concluded.

"But we have not conceded on the point that we need adequate assurances regarding debt relief before we go to our board... I am hopeful we will get there." The immediate consequence of the agreement in Brussels was that Greece will receive the funding it needs to make huge payments due on loans from the European Central Bank and IMF between July and October, and to continue to implement needed reforms through the end of the year.

The disbursement rewards Athens for meeting the reform requirements of the 86-billion-euro bailout programme agreed last July.

But the deal still did not address how the country will avoid being overwhelmed over the long run by its roughly 250 billion euros in debt to official creditors.

The IMF has made reducing that burden a condition for its continued participation in the bailout program, despite opposition from Germany to giving Athens more favors.

Crucially, the IMF and EU creditors disagree on just how much Athens can improve its finances through ongoing reforms.

The Eurogroup insists that Greece will be able to achieve a 3.5 per cent primary budget surplus, which excludes debt servicing, within a few years - giving it substantial room to boost economic growth - but the IMF says a 1.5 per cent surplus is the best that can be expected.

Wednesday's agreement acknowledges the need for debt relief, which could involve loan maturity extensions, long payment deferrals, and interest rate reductions.

But the IMF said the relief would only be delivered at the end of the current bailout programme in mid-2018, and the general parameters sketched out remained too vague.

"We need to sit down and to quantify that," the official said. "We are not in the situation where the IMF can say that we're ready to move ahead." The official said the IMF hoped for a more explicit debt relief plan by year-end, but was uncertain it would happen.

The comments highlighted continued strains between the IMF, the European Commission and the ECB over rescuing Greece.

The three joined together in the first two massive bailout operations beginning in 2010, which failed to stabilise the Greek economy and restore it to growth.

The tensions were evident on Wednesday after Germany's Schaeuble faulted IMF Managing Director Christine Lagarde for her absence from the crunch talks.

"It might have been helpful if the managing director would have been present. This would probably have saved us a number of hours," he said.

The IMF had no comment on the issue; Ms Lagarde had been in Kazakhstan on an official visit at the beginning of the week and was traveling to Japan for the Group of Seven summit on Wednesday.

Critics said the lack of long-term sustainability to Wednesday's deal means little was achieved.

"In a spectacularly sophisticated show of kicking the can down the road, debt relief will be considered - later," said Paul Donovan, an economist at UBS.

Rating agency Fitch kept its Greece sovereign rating at "CCC", just above default, saying that only the short-term threat was averted.

"A question mark is therefore likely to remain over the sustainability of Greek debt in the medium term," it said, adding that without debt relief, the country would face "substantial increases in gross financing requirements."

AFP