IMF forecast for Greece: More gloom and doom

It sees slow growth, high jobless rate and possible failure of rescue plan

ATHENS: An internal International Monetary Fund (IMF) assessment paints a gloomy picture of Greece's ability to recover economically, with years of high unemployment, slow growth and political bickering threatening to undermine a recently approved international rescue programme.

In approving a US$140 billion (S$194 billion), three-year bailout for the indebted European country, IMF and European officials praised the current Greek government for budget cuts and tax increases it has already enacted to right its finances, and for its plans to further overhaul one of the continent's least competitive economies.

But a detailed staff assessment released, as is the routine, after the IMF board approved the rescue programme details both the depth of the social shock in store for the country, and the substantial risks that could leave Greece, at the end of the day, once again facing insolvency.

There are global implications: The Greek rescue programme was approved to stop a 'contagion' from undermining confidence in other indebted European countries, eroding the value of the euro, and throwing the world economic recovery off course with a new financial shock.

The risk that the joint IMF-European Union rescue plan will come undone is 'undeniably high', said the IMF staff note, which detailed the way in which even slight variations in the fund's assumptions about growth, inflation, interest rates, restructuring and other variables could leave Greece's debt load climbing despite the international effort to help bring it down.

The staff note suggested the effort was justified as much by the 'systemic concerns' posed by a Greek default as by the likelihood the programme will succeed.

'Support is nevertheless justified,' it concluded, because the Greek government had proposed an aggressive plan to improve finances and other euro-zone countries were willing to help, and because of the larger problems that could arise 'if Greece were not given an opportunity to improve its economic policies'.

The level of concern about 'spillover effects' became clear last weekend when European finance ministers and the IMF approved a separate, nearly US$1 trillion effort to support other indebted European nations if they run into the type of trouble Greece faced.

The programme was viewed as a necessary emergency measure, but its success is far from guaranteed. After a sharp rally on Monday, European stock markets declined on Tuesday, as did the value of the euro, amid doubts that Europe's massive offer of financing would cure the continent's longer-term economic problems.

That will require political action - not just financing - and the IMF staff note portrayed the pressures likely to mount on Greece. The country must now go through years of 'internal devaluation' - meaning falling wages and living standards, and a drop in economic output.

Unemployment, the IMF projected, will rise sharply, from around 10 per cent this year to near 15 per cent next year.

WASHINGTON POST

Source: Straits Times, 13 May 2010