Published November 12, 2012
BERLIN – Greece will get two more years to reach previously agreed budget goals but the extra will cost the euro zone an additional 32.6 billion euros, draft documents prepared for a meeting of euro zone finance ministers showed on Monday.
The documents were drafted by the International Monetary Fund, the European Central Bank and the European Commission -- together known as the troika -- as a basis for discussions on unfreezing emergency lending to Athens after the country fell behind with reforms and fiscal consolidation.
The aim of an extension is to give Greece time to achieve a primary budget surplus, which does not include the cost of debt financing, which would indicate that the economy is back on track and able to cover its debts without more borrowing.
"Our revised fiscal program targets the 4.5 percent of GDP primary surplus target by 2016, two years later than foreseen," a draft letter of intent between Athens and the IMF said.
"The smoother path will help to moderate the impact of fiscal adjustment on the economy," said the draft.
The two extra years will allow the Greek economy, which will enter its sixth year of recession in 2013, to more quickly return to growth, without which it will not be able to service its debt, seen at 190 percent of GDP next year.
But the slower fiscal consolidation will also mean that the euro zone will have to lend Greece more money to keep it solvent during that time.
"To close the financing gap for the period through 2014, additional programme financing of some ���15 billion is required in the short-term compared to the March 2012 assessment," the report said, although the figures were placed in square brackets. Figures in brackets usually mean the number can still be changed in discussions among ministers.
"Financing needs for the Greek sovereign have to be increased also for the period 2015-16 given the higher debt profile, but also as access to capital markets remains uncertain," it said.
"Additional financing needs for 2015-16 amount to ���14.1 billion if the originally scheduled fiscal adjustment path is maintained and to ���17.6bn if the fiscal adjustment path is extended by two years," the report said, again bracketing the figures.
The report said that even though the perception of Greek policies and credibility could much improve if the country manages to successfully implement reforms for two years, markets would probably remain skeptical about Greece for longer.
The report said that because of the fragility of political support for the Greek government, the economic adjustment programme was risky.
"Risks to the programme remain very large. The key risks concern the overall policy implementation, given that the coalition supporting the government appears fragile and some components of the programme face political resistance, despite the determination of the government," the report said.
"Moreover, the impact on the weakened economy of the pronounced fiscal consolidation in 2013 may be stronger than currently foreseen, even though it could also be mitigated by the liquidity injection from clearance of government arrears.
"Important budgetary measures are likely to be challenged in courts, which could lead to the need to fill a fiscal gap emerging as a consequence. Should product and services market reforms not accelerate as foreseen under the programme, positive economic growth could not return in 2014 as foreseen," it said.
The report said that a return to sustained growth could only be achieved once Greece fully and swiftly implements structural reforms.
"This will require breaking the resistance of vested interests and the prevailing rent-seeking mentality of powerful pressure groups," it said.
There were upside risks too, the report said. These could materialize if there was no longer uncertainty about policy implementation, which would help confidence, and support a stronger recovery of investment. (Reporting By Matthias Sobolewski)