FRANKFURT (MNI) – The Greek government needs to cut an additional
3.5% of GDP from its 2011 budget in order to reach its deficit target,
the staff of the International Monetary Fund reported Wednesday.

Greece’s reform program is, however, gaining ground, the staff
reported, adding that it supports the conclusion of the third review, a
necessary prerequisite for the embattled Mediterranean country to
receive IMF funds.

The country’s debt is seen peaking in 2013, but it could still
spiral to 200% of GDP were there to be a shock to the banking system,
the IMF staff cautioned.

The Greek government passed a “tight” budget for 2011, the IMF
staff noted, targeting a general government deficit of 7.5% of GDP,
consistent with the country’s reform program, which was agreed to last
May as a condition for E110 billion in combined lending from the IMF and
the Eurozone.

“Due to continued recessionary headwinds, some 3.5 percent of GDP
in net new measures will need to be implemented to achieve the target,”
the IMF staff wrote. It elaborated, however, that most of the new
measures have either already become law or are being considered.

The staff wrote that the country’s reform program “is slowly
gaining traction, but more work is needed to deliver the necessary
critical mass of reforms.”

“The program remains at a crossroads. The authorities need to
achieve a shift from stabilization of the fiscal and financial sectors,
to a full set of structural reforms that set the stage for higher growth
and strong job expansion,” the staff assessed.

Policies to bring about such a transformation are in the design
phase and implementation this year is realistic, the staff concluded.
From the Greek perspective, they had better be, since the staff wrote
that these reforms “will be a key subject for future reviews.”

Under the reform program’s base scenario, “debt remains
sustainable,” the IMF staff wrote, “although large risks remain.”

“Debt is expected to crest at high levels and to begin to decline
in 2013,” the IMF staff predicted. “This outcome continues to hinge
crucially on sustained fiscal and structural adjustment.”

“The updated sustainability analysis highlights the risk from
banking system problems given the government guarantees that have been,
or are likely to be, extended,” the staff added.

Were there to be a banking shock, excluding second-round impacts,
debts could rise to over 200% of GDP before retreating “although asset
recovery by the government could provide some benefit,” the staff wrote.

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–Frankfurt bureau, +49-69-720142, tbuell@marketnews.com

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