IMF finds $11bn black hole in Greek finances and warns of new write-off

Recession continues in Greece as unemployment hits 27%, but flickering growth returns elsewhere in EU

The International Monetary Fund warned the eurozone yesterday that it may be forced to write off a chunk of Greece's debt after identifying an $11bn black hole in the finances of the recession-stricken country.

In its regular update on the programme of financial austerity and structural change agreed to by Athens in return for financial help, the Washington-based IMF said weak growth and a sluggish pace of reform had opened up a funding gap in both 2014 and 2015.

The IMF, which is struggling to persuade developing countries to back Greece's bailout, said "debt sustainability" continued to be a risk.

The commitment of Greece's European partners to provide relief as needed to keep debt on the programmed path remains, therefore, a critical part of the programme.

"But the programmed path entails still very high debt well into the next decade, leaving Greece accident-prone for an extended period. Should debt-sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed."

On a day when 11 Latin American countries led by Brazil announced that they had failed to support handing the latest tranche of bailout funds to Greece, the IMF estimated the funding gap for the country that sparked the eurozone debt crisis in 2010 would be $4.4bn in 2014 rising to $6.5bn in 2015

"Greece has made important progress in rectifying pre-crisis imbalances" the Fund said, noting that the country was on the cusp of balancing its books once debt interest payments were excluded and that the trade deficit had also come down sharply.

But it stressed that the adjustment had been caused mainly by recession rather than by an improvement in productivity caused by structural reforms. "The ongoing correction of imbalances has come at a very high cost. The economy is in the sixth year of recession. Output has fallen by nearly 25% since its peak in 2007. The unemployment rate is about 27%, and youth unemployment exceeds 57%.

"To avoid further across-the-board cuts in wages and pensions, and to ensure that the recession gradually bottoms out and gives way to a steady recovery in 2014, it is essential that structural reforms gain much stronger support and momentum."

In the eurozone as a whole, tentative optimism that the recession is finally receding was supported by the first fall in unemployment in more than two years in June. After rising by almost 3.75m to more than 19m since the spring of 2011, the EU's statistical agency Eurostat said the jobless total reduced by 24,000.

While the unemployment rate remained steady at 12.1%, the figures showed wide variations in joblessness. The unemployment rate held steady in Germany, rose slightly in France, the Netherlands and Belgium and came down to 26.3 % in Spain and 12.1% in Italy.

Howard Archer, European economist at IHS Global Insight, said: "June's dip in unemployment is likely a reflection of recent increased signs that eurozone economic activity has stabilised, and it fuels hopes that the eurozone can eke out marginal growth over the second half of 2013."


Larry Elliott

The GuardianTramp

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