December 13, 2016 / 2:03 PM / 8 months ago

Euro zone chides IMF over Greece blog

International Monetary Fund (IMF) Managing Director Christine Lagarde arrives at a Eurozone finance ministers emergency meeting on the situation in Greece in Brussels, Belgium June 27, 2015.Yves Herman

BRUSSELS (Reuters) - Euro zone officials hit back at the International Monetary Fund on Tuesday for publishing an article on the way forward for Greece's fiscal and economic policy that thrust into the open a row between the lenders over Athens' bailout.

"The European institutions were surprised that the IMF staff published a blog post on the ongoing negotiations with the Greek government as new talks in Athens are starting with the aim of concluding the second review," said a spokesman for the euro zone bailout fund, the European Stability Mechanism.

"We hope that we can return to the practice of conducting programme negotiations with the Greek government in private."

The IMF article appeared as the Fund and the euro zone struggle to find common ground on Greek policies that would allow the IMF to take part in the latest bailout, the third one since 2010 and now fully financed by the euro zone.

The IMF, which a group of countries led by Germany very much want to join the latest programme for credibility reasons, says euro zone targets set for Greece are too ambitious and assumptions on reform implementation too optimistic.

It said it was against further austerity in Greece and that a primary surplus target of 3.5 percent of GDP in 2018, on which the euro zone insists, risks damaging the nascent recovery.

The head of the European Department Poul Thomsen and chief economist Maury Obstfeld said a Greek primary surplus of 1.5 percent in 2018 would be enough and stood a better chance of being sustained for several years.

The IMF said the Greek government, with the consent of the euro zone, has already cut investment and discretionary spending too much, while not being able to tackle the more politically sensitive areas like pensions or income tax.

Instead of more austerity which the 3.5 percent primary surplus target would imply, Greece should focus on the creation of a modern welfare system financed with cash from a rebalancing of the Greek tax system and too generous pensions, the IMF said.

The European Commission, which represents euro zone lenders alongside the ESM and the European Central Bank, said there was nothing wrong with the actions envisaged for Greece by the current ESM bailout.

"The European institutions consider that the policies of the ESM programme are sound and if fully implemented can return Greece to sustainable growth and can allow Greece to regain market access," European Commission spokeswoman Annika Breidthardt told a news briefing.

"Greece has already implemented major reforms under the ESM programme and is on track to reach the agreed fiscal targets. It is important that all institutions recognise these achievements of the Greek programme," she said.

The size of the Greek primary surplus is directly linked to the scale of possible debt relief that Greece is likely to need.

Germany wants a higher primary surplus target because it means lower, or even no need for debt relief for Athens -- an important factor in an election year in Germany where public opinion is suffering from bailout fatigue.

Berlin believes that, if Greece carries out all the agreed structural reforms, there would be no need to grant it any relief on its debt mountain of almost 180 percent of GDP, now mainly owned by euro zone governments.

The IMF has a different view.

"Greece's debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief," the IMF said.

Euro zone finance ministers agreed earlier this month that they would only discuss the details of a possible reprofiling of existing loans to Greece and lengthening their maturities in 2018, when the current bailout comes to an end and well after German elections in autumn 2017.

Reporting by Tom Koerkemeier and Philip Blenkinsop, writing by Jan Strupczewski; Editing by Alastair Macdonald

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