The IMF warned on Wednesday that Greece’s drive to shore up its troubled finances would fail unless it sharply accelerated reforms, and the ECB hit back at suggestions a debt restructuring might be the solution.
European finance ministers broke a taboo this week and acknowledged for the first time that some form of restructuring might be required to ease Greece’s debt burden, which at 150 per cent of annual output is among the highest in the world.
They have said they could ask private creditors to agree to a voluntary extension of the maturities on their Greek debt but have also made clear that the priority is to ensure an acceleration of Greek reforms.
“The program will not remain on track without a determined reinvigoration of structural reforms in the coming months,” Poul Thomsen, an IMF envoy who is monitoring Greek economic progress, told a conference in Athens on Wednesday.
“Unless we see this invigoration, I think the program will run off track,” he said, in one of the strongest warnings to Greece since it sealed the rescue one year ago.
Prime Minister George Papandreou’s government has struggled to rein in rampant tax dodging and is under acute pressure to begin selling off state assets to help Greece meet fiscal targets tied to last year’s €110-billion EU/IMF bailout.
Under its rescue terms, Athens is charged with reducing its budget deficit to 7.6 per cent of GDP this year. Thomsen said that without further measures Athens would not be able to get it much below 10 per cent.
The euro struggled to hold onto gains against the dollar and the cost of insuring Greek debt against default rose on Wednesday amid continuing talk of a restructuring.
Euro zone ministers have not spelled out how what they refer to as a “reprofiling” of Greek debt would work. Convincing private holders of Greek bonds to voluntarily accept later repayment could be difficult and require costly guarantees to avoid a hit to banks.
Such a move would buy Greece more time but not reduce its overall debt burden. Many economists believe it would be followed by a more aggressive restructuring involving “haircuts”, or forced losses, of 50 per cent or more from 2013, when policy makers have said they could opt for radical steps.
The European Central Bank, which holds up to €50-billion in Greek sovereign bonds on its own books, has warned that even a “soft restructuring” would put the stability of the euro zone at risk, reiterating that message on Wednesday.
“I’m opposed to soft restructuring because I don’t know what it means. Nobody knows what it means,” Lorenzo Bini-Smaghi, a member of the bank’s executive board, said in Milan.
Speaking in Athens at the same conference as Thomsen, ECB board member Juergen Stark warned policymakers against pursuing any form of restructuring, saying it was an “illusion” to think such a move would resolve Greece’s problems.
ECB vice-president Vitor Constancio warned of “enormous consequences” from a restructuring and said it should only be done as a last resort.
European politicians, however, are under pressure from angry taxpayers to broaden out the burden of their bailouts to include the banks that have bought up Greek debt in recent years.
But they have pledged not to force any losses on private holders of Greek debt before 2013, when a new anti-crisis facility – the European Stability Mechanism (ESM) – is due to take effect.
Before that, any burden-sharing must be done on a voluntary basis, they have said.
Euro zone countries, together with the IMF, bailed out Greece and Ireland last year, and approved a new €78-billion rescue for Portugal on Monday.
“During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors’ decisions. That is inadmissible,” German Finance Minister Wolfgang Schaeuble said in a speech in Brussels.
“It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future,” he added.
Because Greece is not expected to be able to return to the capital markets next year, as envisioned under its 2010 aid package, it faces a €27-billion funding gap next year.
This could be filled by additional money from the EU and IMF, stronger Greek privatization revenues and/or through some form of debt relief – either looser terms on the EU’s loans or maturity extensions for private creditors.
Jean-Claude Juncker, who this week became the first euro zone official to openly acknowledge some form of restructuring might be needed, told Austrian radio on Wednesday that if Greece needed relief the bloc would need to act.
“If all this happens we will have to address the issue of whether a light restructuring of Greek debt could be pursued in which maturities are lengthened, with respect to debt servicing, and interest rate levels (on EU loans are reduced),” he said. “Greece must not be allowed to become a black hole.”
But European governments do not appear to be united behind the idea of a restructuring, no matter how soft it is.
Greece’s Papandreou said late on Tuesday that the costs of a restructuring would “far outweigh any potential benefits” and vowed to launch a “full fledged attack” against tax evasion to meet the terms of the country’s rescue package.
© 2011 The Globe and Mail Inc. All Rights Reserved.
George Georgiopoulos and HarrY Papachristou
Published Wednesday, May. 18, 2011 8:22AM EDT
Last updated Wednesday, May. 18, 2011 9:47AM EDT