The IMF's blunt assessment

Aug 1st 2013, 14:09 by K.H. | ATHENS

Charlemagne

European politics

The Economist

WITH Greece enjoying the best year for tourism since its six-year recession began, it has become easier to believe in official forecasts of a mild recovery next year. But the green shoots of optimism may soon fade if European leaders are unwilling to plug a widening gap in bailout funding for Athens over the next two years and help make its debt burden sustainable by writing off a chunk of bail-out loans.

The IMF’s latest quarterly review of Greek progress with reform, released on July 31st, is appreciative of the achievement of the coalition government led by Antonis Samaras (pictured) so far in reducing deficits. The budget could possibly even show a small primary surplus this year, before debt repayments, though that would not be officially confirmed until next April.

Yet Greece still faces a €4.4 billion ($5.8 billion) funding gap next year, the IMF warns. It has given Greek officials a deadline of early October, when the draft 2014 budget goes to parliament, to find ways of covering the shortfall. The options are clear: unless tax revenues increase sharply during the rest of this year, “a credible 2014 budget would again need to be centred on painful expenditure cuts,” it says.

Yannis Stournaras, the finance minister, rules out more pension and wage cuts next year. Even if they were proposed, parliament would almost certainly reject them. Tax inflows should grow following an overhaul of the revenue administration this year but probably not at the required pace, given continuing problems of political interference. The supposedly autonomous new tax authority is struggling to put down roots and extensions of payment deadlines are frequent. There is little sign that Greeks are becoming more conscientious tax-payers. The IMF notes that 75% of self-employed professionals (among them doctors, lawyers and engineers) reported income last year below the threshold for paying tax.

Mr Stournaras believes Greece can find other ways of closing next year’s gap without making more demands on its creditors. One way would be to sell short-term treasury bills to local banks, a method that has worked in the past. A riskier step would be to return to international capital markets with a modest-sized bond issue, provided, of course, that creditors are willing to give their approval  and that there is investor appetite for what would be the first Greek sovereign offering in four years. Yet the best bet for shoring up the public finances would be to use some of the estimated €6 billion left over from a €50 billion recapitalisation of Greek banks that was completed earlier in the year.

If only that were enough. There is still 2015 to worry about. The IMF believes Greece will need another €5.6 billion of bailout financing before it resumes regular borrowing on international capital markets in 2016 according to the current plan. Greece’s euro zone partners will be asked in October to commit to covering this gap, while the coalition will have to come up with some proposals of its own.

Then there is debt relief. As the IMF points out, if Athens achieves a primary budget surplus this year, euro zone partners have already agreed to “provide further relief to Greece” to ensure its debt falls to 124% of national output in 2020 and “substantially” below 110%  of output in 2022.

If all goes according to plan, the euro zone member-states would have to come up with the equivalent of 4% of Greek output, or about €7.5 billion, by 2015. Yet if the privatisation programme continues to underperform, or growth is lower than projected, or the primary surplus fails to increase, the debt would decline more slowly, raising fresh problems for Greece and its long-suffering partners.