IMF slashes growth forecast for Greece

The International Monetary Fund slashed its growth forecasts for Greece and warned that ever-deepening recession was making it harder for the debt-ridden country to meet the tough deficit reduction targets under its austerity programme.

In a report likely to fan financial market concerns about a possible debt default, the regular health check by staff at the Washington-based Fund said the situation in Greece had “taken a turn for the worse”.

Poul Thomsen, deputy director of the IMF’s European department and its mission chief to Greece, said: “We have revised growth down significantly to -6% in 2011 and -3% in 2012. We expected 2011 to be an inflection point when the recession bottomed out, followed by a slow recovery. But the economy is continuing to trend downwards. The hoped for improvement in market sentiment and in the investment climate has not materialised.”

The IMF, together with the European Union and the European Central Bank has imposed tough conditions on Greece as the price of financial support that has allowed the government in Athens to continue paying its bills. In the fifth report carried out since the start of the crisis 18 months ago, IMF officials suggested that the austerity programme might need to be eased in view of the damage being caused to the economy by the recession.

“Discussions [at the IMF] focused on recalibrating the programme’s macroeconomic framework and adapting the implementation of reform and adjustment policies to an appropriate and feasible pace.”

The IMF had previously assumed that the contraction in the economy would be limited to 4.5% this year, allowing the budget deficit to be trimmed to 7.5% of gross domestic product. Thomsen said the deficit was likely to be 9% of national output this year.

However, Greek officials are privately saying that the budget black hole is likely to be “in excess of 10%”, making the imposition of yet more austerity measures inevitable. “Pay cuts have only made the recession worse,” one source said.

The IMF report added that market sentiment had “steadily deteriorated, with 16.5% of bank deposits withdrawn since the end of 2010”. Since the start of the recession, the economy has contracted by 15%. It has also suffered losses of more than €60bn (£50.5bn) in tax avoidance.

In talks with Evangelos Venizelos, the finance minister, international inspectors urged the authorities to streamline the bloated public sector by both closing state organisations and putting 30,000 civil servants into a special “labour reserve”.

Opening up several “closed professions”, which are often blamed for the country’s notorious lack of competitiveness, has also been suggested. The social implications, however, of further belt-tightening on a populace now stretched to the limit by a barrage of tax increases, wage and pension cuts could be immense.

The report said IMF staff believed that the new Greek government, headed by Lucas Papademos, was committed to the austerity programme. “The authorities have taken steps to bring the fiscal programme back on track, taking meaningful measures to cut public wages, employment and pensions, and to broaden the tax base (prior actions).”

“Still, risks to the programme remain large, both from external sources (the worsening outlook for the euro area), and internal sources (a relapse into weak implementation).” The Fund explained that there was a “growing risk” that the outcome for Greece would be even worse than envisaged, especially if structural reforms were delayed. “Accelerated private sector adjustment, on top of fiscal retrenchment, would likely lead to a downward spiral of fiscal austerity, falling disposable incomes and depressed sentiment. In effect, the economy would rapidly work off its external imbalance through deeper recession and wage-price corrections rather than through productivity enhancing structural reforms.”

In its analysis, the IMF said Greece’s debts were still sustainable even with the gloomier economic backdrop, but only if the country’s private sector creditors accepted a writedown of 50% and Athens received financial support on favourable terms. “The previous 21 July financing package would not work. Public debt would peak at 187% of GDP in 2013 and fall to 152% of GDP by 2020. Net external debt would peak at 128% of GDP in 2012 and fall to 96% of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

“Further progress in reducing the deficit is going to be hard to achieve without underlying structural fiscal reforms. Greece will not be able to undertake – in a socially acceptable manner – the large fiscal consolidation that still lies ahead without a much stronger resolve to tackle the problem of tax evasion.”