Debt-laden Greece and its international lenders must focus less on deficit reduction and more on reform because there are limits to what society can tolerate, a senior IMF official said on Wednesday.
With a long-awaited debt swap deal with private sector creditors almost secured, Athens’ focus is now squarely on its 130-billion euro bailout talks with the IMF, the European Union and the European Central Bank — its public-sector lenders collectively known as the troika.
Structural reforms and spending cuts are the main sticking points in the negotiations, which the EU and Greece want to complete by the end of this week. If they fail, Greece will plunge into a chaotic default that may spill over to other debt-laden countries such as Italy and Portugal.
“We will have to slow down a little as far as fiscal adjustment is concerned and move faster – much faster – with implementing reforms,” Poul Thomsen, the head of the IMF’s inspection team for Greece, said in an interview with newspaper Kathimerini. His remarks were published in Greek.
More reforms and slower deficit reduction would be a policy shift compared with the country’s first 110-billion euro bailout, which relied heavily on tax increases and less on spending cuts and which some economists blame for social unrest and the country’s worst post-war recession.
“Greece must surely continue reducing its budget deficit, but society and political support have their limits and we’d like to make sure that we strike the right balance between fiscal adjustment and reforms,” Thomsen said.
Despite an unprecedented tax onslaught, Greece has been consistently missing its deficit targets. Its budget shortfall is expected to have narrowed slightly last year to 9.6 percent of GDP from 10.6 percent in 2010.
However, some analysts said Thomsen’s suggested policy switch would not work unless Greece’s lenders, including the IMF, increase their aid for Greece above the 130 billion euro mark, some analysts warn.
“It makes sense to put the emphasis on structural reforms and less on deficit reduction but this strategy will mean that Greece needs extra support and, at the moment, I don’t see anybody willing to do that,” said Christoph Weil, a Frankfurt-based economist at Commerzbank.
The minimum wage may have to be lowered and holiday bonuses cut to make Greece’s firms more competitive, Thomsen said in the interview. Greece may also have to fire civil servants, he said, adding however that the vast bulk of savings in the public sector payroll will come from retirements.
Greece’s lenders have demanded it make extra spending cuts worth 1 percent of GDP – or just above 2 billion euros ($2.6 billion) – this year, including big cuts in defence and health spending.
“Talks about the programme will be completed very soon, it is a matter of days,” Thomsen said.
The prospect of elections as early as April has further complicated the talks, with political leaders in Prime Minister Lucas Papademos’s national unity coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.
“We need assurances that whoever is in power after the election and reasonably wishes to make some changes in economic policy will be in line with the targets and the basic framework of the agreement,” Thomsen was quoted as saying by the paper.
Greek banks should not be nationalised as part of efforts to recapitalise them. “We don’t want the state to run banks,” he said.