Greece's international creditors, including IMF, European Commission and European Central Bank, see 'significant risks' that country could miss its debt target and require more bailout loans

Cindy Allen

BERLIN , March 20, 2012 (Associated Press) – Greece's international creditors see "significant risks" that the country might fail to bring down its debt burden within targets, meaning it would require more rescue loans.

In a document seen by The Associated Press on Tuesday, they say Greece's program of austerity measures and structural reforms "could be accident prone."

"Authorities may not be able to implement reforms at the pace envisioned," said the report by the International Monetary Fund, the European Commission and the European Central Bank.

The Greek program could lower debt to 116.5 percent of GDP by 2020, but the minimum target set by the bailout creditors is 120.5 percent by 2020.

On top of concerns that reforms are too slow, the Greek economy faces a grim outlook. It is in its fifth year of recession and would need to recover before debt reduction plans can have much effect.

The Bank of Greece predicts the economy will contract another 4.5 percent in 2012 and remain in recession next year, while unemployment will surpass 19 percent on average this year.

Overall, the bailout creditors' report sees a risk that the program would bring debt down to only 145.5 percent of GDP by 2020, even after taking into account losses accepted by private creditors.

"Stress tests point to a number of sensitivities, with the balance of risks mostly tilted to the downside," said the report dated March, 11.

"Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays," it reads.

Moreover, Greece is heading toward a general election in late April or early May, likely causing further delays to reforms. A new government might take also seek to change the terms of the bailout program.

"It may take Greece much more time than assumed to identify and implement the necessary structural fiscal reforms," the document says. Revenue from selling state assets my also fall behind expectations "due to market-related constraints, encumbrances on assets, or political hurdles," it notes.

"The debt trajectory is extremely sensitive to program delays, suggesting that the program could be accident prone," it said.

A debt level of more than 120 percent of economic output is often seen as unsustainable in the long term. As concerns rise over the country's ability to bring debt back down, investors drive its borrowing rates on bond markets higher. That eventually makes it too costly for the country to tap bond markets to finance its existing debt, requiring it to be bailed out — as happened to Greece, Ireland and Portugal.

Athens received a second bailout this year. Combined with its first rescue package, the country stands to receive a total of more than €172 billion in rescue loans from other eurozone countries and the International Monetary Fund over the next few years.

Greece must continue with its austerity measures in order to ensure the funds are disbursed in regular installments, and will be under tight supervision from its creditors.

Harsh austerity reforms, however, have led to frequent strikes and often violent demonstrations.

Even if the program is successfully implemented, Greece's prospects of returning to the markets to refinance its debt remain uncertain given the likelihood that investors will demand high interest rates, the report noted. The fact that most of Greece's debt is in the hands of eurozone governments and the IMF, which would get repaid first in case of another default, means investors will be wary of buying Greek bonds again.

The report did not provide an estimate of how many billions more Greece might have to borrow from its creditors or Europe's new permanent bailout fund, the ESM, but the finding echoed a similar conclusion in a recent creditors' report on Greece's progress in implementing the reforms.

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