Greece's lenders warn of "very large" risks to bailout

ATHENS Tue Dec 18, 2012 12:04am IST

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won/Files

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.

Credit: Reuters/Lee Jae-Won/Files

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ATHENS (Reuters) - Political resistance and potential court challenges are among "very large" risks to reforms required for Greece's bailout programme, the country's European lenders said on Monday.

The long-awaited report from the European Commission and the European Central Bank details the findings of the "troika" of the EC, ECB and the International Monetary Fund on Athens' efforts to meet targets under its latest rescue package.

The report formally confirmed that Greece deserved further aid under the 130-billion-euro bailout, and a Greek finance ministry source said Athens had received a long-delayed instalment of over 34 billion euros in aid on Monday.

But the lenders warned Athens still risked falling short on its commitments.

"The key risks concern the overall policy implementation, given that the coalition supporting the government appears fragile and some components of the programme face political resistance, despite the determination of the government," the report said.

"Important budgetary measures are likely to be challenged in courts, which could lead to the need to fill a fiscal gap emerging as a consequence."

Greece, which has been bailed out twice by the EU and IMF since the debt crisis erupted, has a long history of missed targets and failure to meet promises to overhaul its bloated state sector and liberalise its recession-hit economy.

A separate report by an EU task force on Monday said by the end of October Greece had completed only 88 of the targeted 300 audits of large tax payers and 467 of 1,300 audits of high-wealth individuals.

Despite the lingering doubts on Greece's commitment and ability to reform, the country's lenders last week agreed to disburse aid to Athens after it bought back its own debt at a fraction of face value, cutting its debt burden.

The decision to unlock aid - expected to total over 52 billion euros by the end of March - removed the spectre of a Greek bankruptcy and euro zone exit.

Even so, Moody's ratings agency said only further debt relief from official creditors, such as governments, would put its debt back on sustainable footing.

The agency classified the bond buyback scheme as a "distressed exchange" and, as a result, a default on the Greek government debt held by private bondholders.

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Prime Minister Antonis Samaras's conservative-led government has promised to restore the country's credibility but his coalition has faced attacks both from within and outside on its plan to push through a new round of austerity.

The troika's report warned those spending cuts next year could hurt the weak economy more than expected, though that could be stemmed by the government paying bills that have been in arrears.

Greece's economy will contract by about 6 percent this year - its fifth in recession - and by a further 4.2 percent next year before growing 0.6 percent in 2014, the report said. But growth would not return without a business reform drive.

Criticising influential business lobbies, it said reviving the economy would require "breaking the resistance (to reform) of vested interests and the prevailing rent-seeking mentality of powerful pressure groups".

The report acknowledged that privatisation proceeds had been disappointing so far but that the programme had gained some momentum since September. It forecast revenue of 8.5 billion euros by 2016 from the asset sales, roughly a billion lower than Athens' own estimates in a mid-term fiscal plan.

"Doubts on the effectiveness of the governance of the privatisation process however continue to persist," it said. (Additional reporting by Lefteris Papadimas; Editing by Ruth Pitchford)

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