International lenders put Greece on notice that it is in danger of losing its next €8bn tranche of bail-out loans without taking action to catch up with its austerity programme and plug a new black hole in this year’s budget.
Officials from the “troika” – made up of the European Union, International Monetary Fund and European Central Bank – abruptly suspended talks and left Greece on Friday in a warning to Athens before negotiations resume in 10 days.
The troika walkout came amid strong disagreements over how to...
cover a projected €1.2bn ($1.7bn) shortfall in this year’s budget and alleged Greek foot-dragging over implementing structural reforms, privatisation plans and improvements to tax collection.
A decision on whether to stop aid payments would have to be taken by European finance ministers and the IMF. If they were halted, the threat of an outright Greek default would soar – with potentially dire consequences for the rest of the eurozone and the global economy.
Fears over Greece and heightened concerns about Italy’s austerity package spooked investors. The ECB was struggling to restore order in the jittery bond markets as the cost of Italian debt rose for a 10th consecutive day and Greek yields rose to fresh highs since the country joined the single currency in 2001.
Greek two-year bond yields, which have an inverse relationship with prices, leapt 4 percentage points to 47.10 per cent. Italian 10-year bond yields rose to 5.25 per cent, while Spanish 10-year yields rose to 5.10 per cent in their sixth successive daily rise.
A troika joint statement said officials had quit Athens “to allow the authorities to complete technical work ... related to the 2012 budget and growth enhancing structural reforms.”
But privately European officials expressed dismay and frustration over Greece’s repeated failures to implement fiscal and structural reforms, warning that future aid payments could be withheld. “It is clear what needs to be done – they just need to do it,” one European official said. “The situation is challenging.”
Troika officials say the deeper than expected Greek recession only accounted for about a quarter of this year’s expected fiscal shortfall. The remainder is put down to implementation delays. One possible compromise would be for Greece to be allowed slippages equivalent to the additional cost of the country’s recession.
Without extra measures, Greece’s deficit is projected to reach almost 9 per cent of gross domestic product this year against a target of 7.6 per cent. “The recession accounts for only part of the shortfall ... Deep spending cuts need to be implemented at once,” said an economist with knowledge of the discussions.
The dispute came at a highly sensitive time for other eurozone member states, which are fighting to win parliamentary approval for a second bigger bail-out-package, agreed in July. “How can you expect the Bundestag to vote through a second bail-out for Greece when it isn’t meeting the promises made in the first package?” said one European official.
Athens gave little sign on Friday that the troika’s pressure tactics were having any effect. Evangelos Venizelos, the finance minister, said the government had no plans to adopt extra austerity measures, blaming a deeper than expected recession for spending overruns and missed revenue targets.
Meanwhile, Italy came under renewed pressure from the Commission and ECB over its adjusted austerity plans, which rely more heavily on a tax evasion crackdown. Jean-Claude Trichet, ECB president, said it was “essential” that spending cuts and economic reforms “be fully confirmed and implemented”.
Friday’s walkout was not the first time the troika has suspended talks with Greek officials over budget disputes. The mission used the same tactic in July, leaving Athens for more than a week while the Greek side beefed up its austerity programme.
In the latest talks the troika proposed accelerating structural reforms by moving public sector workers to a “strategic reserve”of employees, who would receive 60-70 per cent of their previous salary. While the socialist government agreed to cut 150,000 public sector jobs under the terms of a second EU-IMF bail-out agreed in July, it has made only limited progress.
Greece is due to raise €1.3bn this month in privatisation revenues from two deals: new gaming licences for Opap, a football pool operator, and the extension of a concession to operate Athens International Airport.
But the finance ministry wants to postpone sales of state stakes in listed companies due in the next two months because prices on the Athens stock exchange have fallen to a five-year low.
By Alex Barker in Brussels, Kerin Hope in Athens, Ralph Atkins in Frankfurt and David Oakley in London
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