In their most positive assessment so far that offered an
antidote to market skepticism, IMF, ECB and European Commission officials said
Athens would likely meet this year's deficit cutting target, though risks
remained.
"This was a very ambitious program with a lot of
front-loading, and the good news is that it is being implemented as
agreed," the IMF's mission chief for Greece Poul Thomsen told Reuters in
an interview.
Officials from the so-called "Troika" told
reporters at the end of an inspection visit ahead of the release of the second
tranche of the 110 billion-euro ($145 billion) program in September that they
now sought reforms in energy, banking and the public sector.
"Despite considerable progress on a very vast array
of areas, key challenges and risks remain," said Servaas Deroose, deputy
director general for economic and financial affairs at the European Commission.
Commenting on the assessment by the international
inspectors, European Central Bank President Jean-Claude Trichet said at a news
conference in Frankfurt, "It doesn't mean that a very hard job should not
continue to be done."
Reforms were crucial to restore investor confidence and
allow Greece to return to international bond markets some time next year as
planned.
Deroose said Athens must come up with a plan to free up
the energy market by the end of the year, adding the banking sector also needed
restructuring. He said the government was preparing a strategic review of
lenders in September.
Greece's debt crisis has shaken the euro zone and
effectively blocked Athens from markets, with the cost of borrowing briefly
hitting 1,000 basis points over German bunds. Spreads have been relatively
steady at around 750 basis points since Prime Minister George Papandreou asked
for aid in May.
Five-year credit default swaps were at 712 basis points
at 1030 GMT versus 130 for Italy, the benchmark for the euro zone's peripheral
economies. This means it would cost 712,000 euros to insure 10 million euros of
Greek debt against default.
Analysts said Greece now may actually come close or even
meet a target to cut its budget deficit from 13.6 percent of GDP in 2009 to 8.1
percent this year, thanks to bigger than expected spending cuts offsetting low
revenues.
"People were fearing that the program was not
succeeding just a few months ago. So, it's definitely a positive development,"
said Giada Giani of Citigroup. "It does not mean that the challenges are
not there anymore.
Finance Minister George Papaconstantinou said Greece may
actually do better than expected on the deficit target despite lagging
revenues.
"On the basis of GDP development and higher than
expected inflation ... we will have a deficit below 8.1 percent by the end of
the year," he told reporters.
Inspectors said the biggest spending risk areas are state
hospitals, municipalities and state-owned companies, which have long burned
holes in the budget.
A weak economy was also a challenge. Despite the
government's more optimistic views of a milder than expected recession, the IMF
and the EU said there was no reason to revise a 4 percent GDP decline. Greece
plunged into its first recession in 16 years in 2009 after years of booming
growth.
Inflation has jumped to over 5 percent in May and June,
much higher than the euro zone average, partly due to value added tax (VAT) and
other tax hikes, showing weak competitiveness and highlighting the need to open
up professions and markets.
The EU and the IMF revised their inflation forecast for
this year to 4.75 percent from an earlier 1.9 percent projection but said they
expected the pace to slow to 1.5-2 percent next year.
After a slow start, Papandreou's socialist government has
bitten the bullet and imposed draconian austerity measures, cutting public
salaries and hiking taxes.
It has launched long-delayed pension and labor reforms,
despite strikes and protests that have disrupted tourism, transport and
services, and eroded its popularity.
On Thursday, the Finance Ministry was briefly evacuated
due to a bomb hoax just as the minister was due to begin a news conference on
the "Troika" visit.
Opposing the reforms, seamen blocked ports at the start
of the key tourist season in May and truckers went on strike for a week
affecting fuel and goods supply, but the government stood its ground and
ordered them back to work.
Thomsen welcomed the government's firm stance: "What
this has shown to me is that this government is serious about reform. It is not
going to back off just because a special interest group is opposing
reforms," he said.
But analysts say the next clash with workers, expected to
be with the powerful union at the state PPC utility opposing liberalization,
will be much tougher.
Analysts said they would be eyeing longer term reforms to
assess if Greece is making real progress.
"Bringing the deficit below 3 percent of GDP (by
2014) is obviously going to take a long time, so the risk is whether the
strength of the reforms and the strength of the fiscal tightening remains in
place over the coming years," said Diego Iscaro of IHS Global Insight.
"Especially because the political situation is likely to deteriorate ...
if unemployment remains high and people are more unwilling to make
sacrifices," he added.
