Greece's international creditors warn that second rescue package may not be sufficient to save country from bankruptcy but recommend that Athens get its second bailout loans so country does not default next month
October 20, 2011
– Greece's international creditors warn that a second rescue package tentatively agreed in July may not be enough to save the country from bankruptcy, but believe Athens should nevertheless get its next batch of bailout loans, according to a draft of a debt inspectors' report obtained Thursday by The Associated Press.
Although the inspectors said Greece has missed its deficit-cutting targets and that the pace of its reforms is insufficient, they said Athens should get euro8 billion ($11 billion) of bailout loans as soon as possible so the country does not default on its debts next month.
Greece has been relying on a euro110 billion ($152 billion) package of rescue loans since May last year. In July, eurozone leaders tentatively agreed in a second euro109 billion bailout, that would also seen banks and other private bondholders give Greece easier terms on its debt.
However, the inspectors from the European Commission and the European Central Bank said Greece's debt dynamics remain "extremely worrying."
Even though the second bailout would reduce Greece's finance needs in the coming weeks, "this could not suffice for the debt dynamics to be described as sustainable" if Greece's implementation the bailout program remains weak, the report says.
The International Monetary Fund, which is also a creditor and part of the so-called troika, will issue its report on Greece'e efforts separately.
But the conclusions from the two other institutions pile pressure on European leaders at a key summit this Sunday to make private creditors like banks take more losses on the Greek bonds they hold.
The report adds that Greece's overall "debt sustainability has effectively deteriorated, given delays in the recovery, in fiscal consolidation and in the privatization plan, as well as the perspective of bank recapitalizations."
The report, sent to German lawmakers Thursday, said the reform efforts by the Greek government are "very large", but targets for September "appear to have been failed by a small margin."
"The implementation of the growth-enhancing structural agenda continues, but the pace of reform has so far been insufficient," the report said.
The next steps in Europe's sprawling sovereign debt crisis will be the top issue at a summit of the EU's 27 leaders starting Sunday in Brussels.
The leaders are set to discuss the second, euro109 billion ($150 billion) bailout package for Greece, which includes a participation of private Greek bondholders. In the original deal agreed tentatively in July, the private bondholders renounced on about 21 percent of the money they are owed. Germany and other rich countries, however, want banks and other financial institutions to renounce on as much as 50 or 60 percent to make Greece's debt burden more viable, according to European officials.
As Greece's economy keeps shrinking, its debt burden -- measured as a percentage of GDP -- keeps mounting, and no improvement appears to be in sight.
The debt inspectors said Greece's recession "is substantially deeper than previously projected" as the country implements its austerity measures.
Economic activity was 6 percent below its level a year ago in the first six months, they said, with the overall contraction for 2011 estimated to be a steep 5.5 percent.
"The projections for 2012 are also revised downwards to a contraction of 2 3/4 percent, and modest positive growth rates are delayed to 2013," the report said, while also lowering the medium-term growth prospects for the years beyond 2015.
The deterioration of the economic activity will make policymaking more challenging, the report acknowledged. "Given the scale of the required reforms, political coordination inside the government and consensus in the whole Greek society remain as essential and decisive as ever," it said.
Greece was paralyzed on Thursday by the second day of a general strike against the harsh austerity measures already implemented.
In Athens, protesters gathered by the tens of thousands outside the Greek parliament, ahead of a vote on intensely unpopular new austerity measures.
Police said at least 50,000 people had flooded the square on the second day of a general strike that paralyzed the country, and more were arriving. Earlier, a communist party-backed union abandoned a bid to prevent lawmakers from entering parliament after riot police shut down main access roads.
Though largely peaceful, Wednesday's massive protests in Athens was marred by attacks on police and public property.
The austerity bill won initial approval in a first vote Wednesday night, and deputies are now to vote on the details, which suspending 30,000 public servants on reduced pay and suspending collective labor contracts.
Creditors had demanded the measures before giving Greece the next batch of bailout loans.
Steinhauser reported from Brussels. Nicholas Paphitis in Athens contributed to this report.
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