PARIS (MNI)- The Greek economy is continuing to deteriorate and the
decline is likely to push the government’s budget deficit to 9% of GDP
this year, the head of the International Monetary Fund’s mission to
Greece said on Tuesday.

Speaking on a conference call with reporters, IMF mission chief
Poul Thomsen said that the combination of a slow pace of structural
reforms in Greece and a worsening international environment meant that a
hoped-for stabilization of the economy had not materialized.

“We are facing much stronger headwinds,” said Thomsen, who was
speaking from Athens about the IMF’s recent fifth review of Greece’s
E110 billion bailout package. The Fund released a E2.2 billion aid
tranche to Greece following the review. That was its contribution to a
total payment of E8 billion for Greece, the remainder already approved
by the EU.

Poulsen said the IMF expected Greece’s economy to contract by 6%
this year followed by a further 3% decline in 2012. The country’s 6.5%
deficit target for 2012 will be “challenging,” Poulsen said, although he
declined to say if he thought additional deficit cutting measures by the
government in Athens would be necessary.

Poulsen also declined to comment directly on the current talks with
Greece’s private-sector creditors for a 50% haircut on their holdings of
Greek government debt, but he said that the success of those talks was
critical to the country’s outlook.

“I think that the PSI that is on the table is key to restoring debt
sustainability,” he said. “I am confident that we will get this PSI.”

An IMF paper released Tuesday warned that “with low participation
in the debt exchange and a significant amount of holdouts,” Greece’s
debt could remain above 145% of GDP by 2020, rather than drop to the
120% level expected if the PSI deal goes through.

Poulsen said that the lack of broad popular and political support
in Greece for the bailout had been a key problem, and that the recent
appointment of a unity government was a positive factor.

But he said the pace of structural change needed to be stepped up,
because if reforms were allowed to lag and the PSI-talks dragged on, a
new downward spiral in the Greek economy could not be ruled out.

“Progress has been made on many fronts but there is still a long
way to go,” he said. “Greece is still well away from the critical mass
of reforms needed to transform the investment climate.”

–Paris newsroom +33142715540, jduffy@marketnews.com

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