Greece Is Warned of New Aid Gap

Shortfall Could Be Even Greater If IMF’s Outlook Is Optimistic

Greece faces an additional financing shortfall of nearly €11 billion ($14.6 billion) by the end of 2015, the International Monetary Fund said on Wednesday, warning that the gap could be bigger if growth falls short of estimates.

That figure is higher than earlier euro-zone projections, and combined with the IMF’s estimate of the amount of debt relief Athens needs, would force Europe to cover any extra financing needed to keep Greece afloat, including potential write-offs of rescue loans extended to Greece over the past three years, in order to make the country’s debt load sustainable.

That puts the IMF at odds with the euro zone’s strongest member, Germany, where the government is avoiding talk of debt reductions and new Greek loans ahead of elections in September.

Without additional euro-zone financing, the IMF said, Greece might not be able to pay back its loans to the fund. That would it make it even more difficult for Athens to tap private financing or attract investment needed to spur growth. As Greece repeatedly risked defaulting on its loans over the past several years, officials throughout Europe openly discussed the possibility of a Greek exit from the currency union.

In turn, it could then fuel financial problems throughout the currency union, starting in Portugal, Spain and Italy, but spreading to the core economies such as France, which are vulnerable to ailing members.

The details, revealed by the fund in its latest assessment of the international bailout for Greece, are likely to add to Athens’s troubles as the coalition government struggles to maintain its bailout program and political power.

Meanwhile, the European Commission, European Central Bank and the IMF on Wednesday said neighboring Cyprus is on track with overhauls, but that challenges remain, potentially opening the door for the country to receive more international assistance.

Greece’s bailout faces a €4.4 billion financing gap in 2014 and an additional €6.5 billion in 2015, according to the IMF’s assessment.

In mid-June, a European Commission spokesman said a hole in Greece’s funding gap through the end of 2014 could be plugged by using leftover funding from a €50 billion package earmarked to recapitalize the country’s banks.

Greece’s bank-rescue fund said on Tuesday that it has roughly €12 billion left over from that package, hinting that might be able to plug the financing gap if it doesn’t widen beyond the fund’s current estimate.

“The compliance report was just published and we have no further comment,” a commission spokesman said on Wednesday.

The gap could be even bigger if the fund’s growth outlook is overly optimistic or if Greece doesn’t reach its privatization revenue target, said Poul Thomsen, head of the IMF’s mission to Greece. Both have historically proved true for Greece’s bailout. The more growth falls short of the fund’s forecast, the bigger the financing gap and needed debt relief.

 For the past five years, the fund has consistently forecast an outlook that has turned out to be far too rosy. Higher growth forecasts help assume more revenue, hiding failures to cut spending and offsetting a financing gap that would prevent IMF lending. In March 2012, for example, the IMF estimated Greece would exit a severe recession this year. The reality is a fifth consecutive year of contraction that was originally only supposed to last two.

“There are clearly downside risks [to the economic forecast] next year,” Mr. Thomsen said during a conference call. “A gradual recovery is based on the assumption that we have a rebound in consumption and investment, and sustained implementation of policies and broad political support of the program.”

But aAt least one of the 24 IMF executive directors declined to back the latest €1.7 billion tranche of funding for Greece on Tuesday, even though it was approved by the board’s majority. Paulo Nogueira Batista, the IMF board member for Brazil and 10 other member countries, said the staff’s debt outlook “seems all but a delusion” and the growth outlook overly idealistic. Brazil’s objection doesn’t directly affect the IMF’s bailout. But the rare public airing of a board member’s anxieties about the Greek bailout underscores the risks of the Greek bailout.

Emerging markets, still nursing memories of tough IMF bailouts in previous decades, have criticized the fund for treating the broader euro zone with what they call an unfair favorable bias at the expense of Greece. Some have suggested the IMF should have forced French and German banks to take losses on Greek government bonds early on in the program, allowing Greece to avoid drowning under a tsunami of debt.

“The widespread perception that the hardship brought on by draconian adjustment policies is not paying off in any way has further undermined public support for the adjustment and reform program,” Mr. Batista said.

Mr. Thomsen said euro-zone finance ministers would have to agree to cover the 2014 financing gap before the IMF board considers the next bailout review, possibly as early as October. “I have no doubt that we will see a bottoming out and gradual recovery in output next year. The exact timing is where the uncertainty comes,” he said.

With a razor-thin majority in Parliament, Greece’s ruling coalition hopes to hang on to power despite rising unemployment and fatigue over austerity until after German elections in September. Once that political hurdle is crossed, Greece hopes Berlin will finally allow negotiations on the politically sensitive issue of cutting the value of Greek government debt held by the currency union’s members.

But, if the growth outlook disappoints, it could also push up the estimated debt relief the IMF says Greece needs to avoid default on its loans to the fund.

It could also force the euro zone to accelerate talks on debt restructuring, a topic few officials even want to acknowledge, much less discuss.

“Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed,” the IMF said.

Spokesmen for German Chancellor Angela Merkel and her finance minister both repeated Wednesday that they remain opposed to any write-down of their claims against Greece. A write-down would be difficult to explain to German voters and would be seen by many as an implicit admission that the austerity-led approach had failed.

Last week, an EU official said Greece faces a shortfall of around €3.8 billion between now and the end of 2014, lower than the IMF’s estimate.

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