Greece Flunks Troika Report, Financial Reforms at Standstill; 5th Payment on Hold? Expect IMF &quot;Nose Job&quot;

On May 28 Greek Finance Minister George Papaconstantinou went into a temper tantrum over an article in Der Spiegel that stated Greece missed its financial targets.

Papaconstantinou noted the report was not even out yet adding, "I have every reason to believe they will end positively for our country and that we will receive the fifth tranche."

He may be correct about the tranche, however, the report is now out and Greece flunked.

Financial Reforms at Standstill

The Irish Times reports Troika insists reforms in Greece at a standstill

GREEK EFFORTS to stabilise public finances and push through reforms have ground to a halt in the last quarter, according to officials from the IMF, the ECB and the European Commission.

The latest so-called ?Troika? report, seen by The Irish Times yesterday, made a grim impression when presented to German MPs in Berlin yesterday evening.

At a crunch parliamentary party meeting, members of the ruling Christian Democrats (CDU) and Free Democrats (FDP) heard that Greece will require fresh aid from euro zone members because of the ?prohibitive? cost of the alternative: returning to financial markets.

?The financing strategy needs to be revised,? said the report?s authors.

?Given the remoteness of Greece returning to the funding markets in 2012, the adjustment programme is now underfinanced. The next disbursement cannot take place before this underfunding is resolved.?

?After a strong start in the summer of 2010, reform implementation came to a standstill in recent quarters,? said the report. Citing ?clear political risks? in implementing the EU-IMF reform programme, the authors warned that ?a reinvigoration is necessary to prevent the fiscal deficit getting entrenched at unsustainable levels?.

At macro level, the troika said the Greek recession is ?somewhat deeper and longer than initially projected? ? with 4.5 per cent economic shrinkage last year and a further 3.8 per cent contraction forecast this year ? but that ?the quarters of deepest contraction may have already been passed?.

Additional Details from Athens News

Athens News reports Troika report on Greece unveiled

"Tax collection continues to underperform compared to plans, even after the downward revision agreed in previous reviews. Although part if this underperformance results from the severity of the recession and liquidity constraints faced by taxpayers, the several measures to fight tax evasion implemented by the government have not been fully effective yet."

"The previous review mission (February 2011) identified that, without additional measures, the fiscal target for 2011 would be missed by at least three quarters of a percentage point of GDP. In the meantime, the gap between fiscal projections and the deficit ceiling has widened substantially. If no action was taken, the government deficit in 2011 would remain close to the 2010 level, above 10 percent of GDP."

Next Trance In Question?

Please consider Next aid payment not a done deal

Troika says 5th payment to Greece may have to wait; recession proves deeper, longer than expected

The European Union, European Central Bank and International Monetary Fund mission to Greece said in a report on Wednesday that the next disbursement of Greek aid could not take place until it corrected the underfinancing in its adjustment program.

?The financing strategy needs to be revised. Given the remoteness of Greece returning to funding markets in 2012, the adjustment program is now underfinanced,? it said. ?The next disbursement cannot take place before this underfinancing is resolved.?

The fifth bailout payment was due to be made in June.

News of a possible hitch in the next disbursement of aid to Greece came as Germany?s finance minister said private creditors must share the burden of more financial help for Athens in any deal to prevent the country from defaulting on its debts.

In a letter sent to Jean-Claude Trichet, president of the ECB, the IMF?s acting managing director John Lipsky and other top finance officials, Wolfgang Schaeuble proposed a bond swap that would extend debt repayments by seven years, giving Athens more time to reform its economy and overcome the debt crisis.

Such a move has previously been strongly opposed by the ECB on the grounds it could spread turmoil through the continent?s financial system, while rating agencies have warned it could be considered a default.

Expect IMF Nose Job

The report was so bad it is hard to say what the key point is, but near-term this is arguably the key quote:

?Given the remoteness of Greece returning to the funding markets in 2012, the adjustment programme is now underfinanced. The next disbursement cannot take place before this underfunding is resolved.?

However, the market does not seem to be reacting to those statements. That means the IMF and EU will hold their noses and pony up, most likely with still more ridiculously optimistic targets about what Greece can achieve in the next two years.

Summation of Troika Report Badness

Greek reforms at a standstill
Recession deeper than expected at -4.5%
Clear political risks
Reinvigoration is necessary to prevent the fiscal deficit getting entrenched at unsustainable levels
Financing strategy needs to be revised
Tax collection continues to underperform compared to plans, even after the downward revision agreed in previous reviews
Gap between fiscal projections and the deficit ceiling has widened substantially
If no action is taken, the government deficit in 2011 would remain above 10 percent of GDP

There is additional bad news elsewhere.

Greek industrial production fell 11 percent year-on-year
Greek unemployment is 16.2 per cent, the highest in the euro-zone after Spain
The IMF and EU want more austerity measures and higher taxes

Greek Finance Minister George Papaconstantinou bought Greece a week's time but now looks more than a bit foolish. Der Spiegel has been vindicated. Greece flunked.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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