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Greece ordered to cut deeper to get past debt 'crossroad'

23 November 2010, 15:47 CET
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(ATHENS) - Greece won approval on Tuesday for a new slice of rescue funding but the IMF and EU prescribed even tougher action on tax evasion, waste in health care and on state companies to merit another payout.

They also warned that Greek wages were too high and said the country, saved from imminent insolvency in May, faced potential problems in repaying on time -- although solutions were available in that case.

The expert auditor from the International Monetary Fund, Poul Thomsen, said: "The programme is at a crossroad."

The approval for the third tranche of rescue funds had been delayed by a day because negotiations on deeper austerity measures, described as "difficult" by the Greek side, were continuing, just as the European Union was putting in place a rescue for Ireland, the second eurozone crisis in six months.

The EU and International Monetary Fund auditors, saying that Greece was "largely on track" with reforms to correct its public finances, approved the release in December of 9.0 billion euros in rescue funds.

A fourth, far bigger slice of 15 billion euros due by March would depend on progress made with the latest requested measures to fight a massive budget deficit and national debt.

The auditors, speaking after a regular review of Greek public finances imposed under the 110-billion-euro (150-billion-dollar) May rescue, did not rule out extending the repayment timetable or providing a further loan.

The Greek government was determined to move on structural reforms, Thomsen said. "We are largely on track, with small deviations, we are close to targets."

He said that "the main risks are linked with the possibility that reforms are delayed ... This is the key question."

For the European Commission, Servaas Deroose said: "Reforms have to be done in the labour market in order to restore competitiveness."

Wages in Greece had doubled between 2000 and 2008, he said. "It's an excessive evolution."

The auditors from the IMF, EU Commission and European Central bank, said in a joint statement:

"New measures have been agreed to broaden tax bases and eliminate wasteful spending, particularly in the areas of health spending, which is inefficient relative to other eurozone countries."

The statement also said that action was needed on "state enterprises, which are a heavy burden on the economy with perennial losses for Greek taxpayers."

The government has to push on with reforms of the tax administration for which new measures to strengthen tax compliance were coming into effect.

Asked whether the May package could be extended, Thomsen noted that the initial loan was for a relatively short time.

"We are confident Greece will be able to return to the (financial) market before the end of the programme," he said.

"But whether it's going to be able to return to the market on a scale that will allow it to borrow, not only to roll over its obligations, on the market but also repay the IMF fund and the European partners, that is admittedly a question."

If there were problems, "we have options of allowing longer repayment periods or to give a follow up loan" although he hoped that Greece would be able to borrow sufficiently to begin repaying the EU-IMF loan as agreed.

Greece was forced to appeal for help to avert insolvency in May largely because international investors had become so reluctant to lend to it that its interest rate on borrowing had risen to an unbearable level, of about 12 percent at one point.

The Greek banking system is now heavily dependent on special cheap financing from the European Central Bank.

Greek Finance Minister Georges Papaconstantinou said Tuesday the government has more than doubled its privatisation target to seven billion euros within three years, including one billion in 2011, as it sought to restore the public finances.

"It is an ambitious target" but necessary to put public finances on a stable footing and "contribute to attracting foreign investments into the country."

Papaconstantinou called cutting Greece's bloated public sector another great challenge and announced that only one in five people leaving public institutions would be replaced.


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