Greece needs substantial relief to render its debt load sustainable and help set its ailing economy on a recovery path, the International Monetary Fund said in an annual review on Friday.
The review, which is separate from current bailout implementation talks, said debt relief must be calibrated on credible fiscal and growth targets, and noted that current primary budget goals beyond 2018, which exclude debt servicing costs, are unlikely to be reached.
“The authorities’ current targets remain unrealistic, in that they still assume that Greece will attain and sustain primary surpluses of 3.5 per cent of GDP for many decades despite double-digit unemployment rates,” the IMF review said.
“It cannot be assumed that Greece can simply grow out of its debt problem. Further debt relief will be required to restore sustainability.”
The IMF, which has yet to decide whether it will participate in Greece’s third international bailout, has been pushing for softer fiscal goals before it will contribute some of the €86bn in financing.
Athens welcomed the IMF’s view that significant debt relief was needed.
Greece’s leftist-led government and the central bank also want lower primary surplus targets after 2018, arguing this will give Athens room to cut taxes and help the battered economy return to growth after a protracted recession.
Struggling under a debt mountain that is more than 170 per cent of its economic output, Athens has committed to attain a 3.5 per cent primary budget surplus by 2018.
The IMF also said Greek banks must reduce their load of non-performing loans (NPLs) rapidly to set the stage for credit growth in the economy and that structural reforms need to be accelerated to boost productivity and growth.
“NPLs have reached close to 50 per cent of total loans, the second highest level in the euro area. Putting in place policies that support a rapid clean up of bank balance sheets is critical to achieving a successful economic recovery,” the IMF said.
Delia Velculescu, the IMF’s mission chief in Greece, said that on the fiscal side the policy mix needs to be rebalanced more towards growth-friendly policies and not more austerity.
“The policy of repeatedly hiking already high tax rates prompted a proliferation of instalment and deferral schemes. Their frequency and the inability to enforce them suggest they are seen as de facto tax forgiveness,” Velculescu said.
Referring to the country’s ailing pension system, which has been a drag on the budget, she said current policies of sheltering current pensioners while relying on high tax rates and lower expected payouts for current workers inhibit growth.
“To create space for needed social spending to protect vulnerable groups … a further reduction in current pensions is necessary,” Velculescu said.