IMF, EU, ECB: Greece made progress in dealing with financial crisis, but challenges remain

Greece close to next loan amid progress on debt

ATHENS, Greece — Greece has made “remarkable” progress implementing an austerity program to tackle its debt crisis and is expected to receive the second installment of rescue loans next month, the IMF and EU said Thursday. They warned, however, that the country still faces significant challenges.

Greece came to the brink of defaulting on its mountain of debt in May, and was saved by the first installment of a euro110 billion ($145 billion), three-year package of rescue loans set up by the International Monetary Fund and by other European Union countries using the euro currency.

Athens is set to receive the second installment — euro9 billion ($11.8 billion) — between Sept. 13 and 15.

“I’m definitely confident that we are going forward with this disbursement,” IMF mission chief for Greece Poul Thomsen said during a joint news conference after a two-week inspection visit by officials from the IMF, ECB and European Commission, locally dubbed the “troika”.

Formal approval by IMF, ECB and Commission headquarters is needed before the funds can be released. Athens received the first loan installment of euro20 billion in May.

“The first assessment is totally positive, the next tranche of the loan is secured” and will be disbursed by Sept. 15, Finance Minister George Papaconstantinou said during a news conference that was delayed for two hours due to a bomb scare in his ministry. Authorities evacuated journalists and staff from the building, but no explosives were was found.

“The there no new memorandum or new (austerity) measures. … But there are new challenges,” Papaconstantinou said.

In return for the rescue loans, Greece has been pursuing a strict austerity program which has seen it cut civil service pay, trim pensions and increase taxes. The government’s progress has been under quarterly review by the IMF, the European Central Bank and the European Commission, the EU executive. “Our overall assessment is that the program has made a strong start,” the organizations said a joint statement.

All end of June targets had been met, they said, “led by a vigorous implementation of the fiscal program, and important reforms are ahead of schedule. However, important challenges and risks remain.”

Thomsen said the government’s austerity program “is indeed off to a very strong start but as expected there are pressure points,” adding that there was “clearly a need to control extra budgetary expenses,” including in state hospitals and at the municipal level.

Papaconstantinou stressed the government was proving it was delivering on its promises despite the skepticism of some international analysts who think Greece may eventually have to restructure its debts.

“We have defied all the doomsayers,” he said. “They say we would suspend payment — that didn’t happen. They said we would not receive loans — that didn’t happen. Now they say we won’t get the next installments of loans — that won’t happen either. We will get the second and third and all the installments … because we are implementing our commitments.”

Servaas Deroose, a representative for the European Commission, said major reforms, particularly in the pension system, were ahead of schedule.

“The program has made remarkable progress,” he said, but added that there was “a need to consolidate the progress of the first half.”

Greece has pledged to reduce its deficit from 13.6 percent of gross domestic product last year to 8.1 percent at the end of 2010 and under 3 percent — the EU’s official upper limit — in 2014.

The debt crisis broke out when the newly elected Socialist government last October revised its deficit projection from 3.7 percent of GDP, and said the country’s statistics had been fudged by the outgoing Conservatives. The revelation of the size of Greece’s debts sent the country’s borrowing rates on the international markets skyrocketing to unsustainable levels, reaching four times those of Germany’s.

The IMF and eurozone rescue package was aimed at giving the country time to implement difficult reforms without having to tap the bond market to service its existing debt — although the rescue loans still carry a higher interest rate than those faced by other EU countries, at about 5 percent.

Thomsen said markets were beginning to react positively to the government’s austerity measures, but that Athens was not expected to return to the international bond market in the near future.

“Markets are starting to realize that Greece is making major reforms and this is not business as usual,” he said, adding that a “sustained period of policy implementation” was still needed.

“At this stage we do not expect a return to the bond market anytime soon,” he said.

The delegation said Greece’s economy was expected to contract by 4 percent this year — in line with projections made in May — and by about 2.5 percent in 2011. Inflation, however, was higher than expected, with the three revising their 2010 estimate to 4.75 percent this year and about 1.5 to 2 percent next year, mainly due to higher taxes.