BUSINESS

IMF backs $36.56 billion Greek aid; S&P says new bonds still vulnerable to default

03/15/2012 12:37 EDT | Updated 05/15/2012 05:12 EDT
ATHENS, Greece - The International Monetary Fund on Thursday approved €28 billion ($36.56 billion) in funding for crisis-hit Greece over the next four years, while Standard and Poor's warned that the country's new bonds remained vulnerable to default despite this month's massive debt writedown.

The IMF's executive board granted the immediate release of €1.65 billion ($2.15 billion) of these funds as part of the country's second bailout, a statement said.

Greece will receive a total €172.7 billion in rescue loans from its eurozone partners and the IMF to keep it afloat until 2016, as dizzily high borrowing rates have blocked its ability to raise money on the international bond markets.

IMF Managing Director Christine Lagarde warned that risks to Greece's austerity and reform program still "remain exceptionally high, and there is no room for slippages." She said new pain lies ahead for Greeks, despite the tough measures implemented over the past two years.

"Full and timely implementation of the planned adjustment — alongside broad-based public support and support from Greece's European partners — will be critical to success," she said in a statement.

"Significant further fiscal adjustment is necessary to put debt on a sustainable downward trajectory," Lagarde said, adding that politically difficult additional spending cuts worth about 5.5 per cent of GDP — some €11 billion — lie ahead in 2013 and 2014.

Chief IMF inspector for Greece Poul Thomsen said Athens should focus on spending cuts, improving tax administration and fighting tax evasion, rather than further hiking taxes.

He added that Greece could regain market access before 2020, although it would have to accept relatively high interest rates at first.

Without the bailout, Greece would have been forced into a messy default of a €14.5 billion bond repayment due on March. 20, a move that could have sent shock waves throughout the global financial system and further destabilized the group of 17 countries that use the euro as their currency.

The new bailout cash was approved after Greece secured a massive debt-reduction deal with banks and other private bond holders, swapping old government bonds for new ones that have better repayment terms.

The ratings agency Standard and Poor's assigned a CCC score — or still vulnerable to default — and said Greece's sovereign rating would remain in selective default until the exchange was completed next month.

Following the exchange, the agency said it would "likely consider Greece's selective default to be cured" and assign the country a CCC sovereign rating. Standard and Poor's said the risk of a second Greek debt restructuring in the immediate future was reduced, but warned that political consensus for further reforms appeared to be weakening.

The country has survived since May 2010 on a first rescue loan package worth a total €110 billion ($143.63 billion). In return for both bailouts, Athens has imposed deeply resented austerity measures, slashing pensions and salaries while repeatedly increasing taxes in a bid to reduce a budget deficit bloated by years of profligate government spending.

Amid the cutbacks, tens of thousands of businesses have been forced to close, unemployment reached a record high of 20.7 per cent in the last quarter of 2011 while the country is in a fifth year of deep recession.

The IMF forecast that the economy will shrink 4.5-5 per cent this year, while recovery is expected to begin in 2013.

The country's main political parties have promised to honour austerity commitments after elections expected in late April or early May.

Also Thursday, Finance Minister Evangelos Venizelos said he would ensure the terms of the bailout deals would be met if he is part of the next government.

Venizelos is the only contender for the leadership of the majority socialist PASOK party in a vote this Sunday. Once he takes over the party helm, he will resign as minister to focus on the election campaign.

"It is hypocritical to say that you can sign commitments and then say you are not bound by them. That's an insult to our intelligence," Venizelos said.

PASOK has seen its popularity plunge and opinion polls indicate no party will win an outright majority in the election, amid public anger at protracted belt-tightening.

Meanwhile, a European Union inspector reported rare progress in Greece's effort to reform its large civil service — one of the key austerity measures and a condition of receiving the bailout.

Horst Reichenbach, heading an EU task force sent to Greece to assist painful structural reforms, said there had been a "number of very positive developments" including an improvement in clearing tax arrears.

"It is now possible to have a new start on a much more solid basis" after the bond swap and the second bailout, Reichenbach told a press conference in Athens.

But he said much remains to be done, particularly in cutting red tape. Reichenbach said Greek customs controls for exports currently take about 20 days, double the EU average.

"Export performance could be increased by approximately 10 per cent if Greece would reduce the control time to the (EU) average," he said.

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Derek Gatopoulos in Athens contributed to this story.