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IMF, Troika Divided Over Greek Rescue

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Dissension over Greece’s second bailout is dividing the bodies that make up the troika, the so-called joint commission of the International Monetary Fund, the European Union and the European Central Bank.

While a draft of the report to be issued by the troika on Oct. 24 recommended that monies be paid out as quickly as possible despite what it called “extremely worrying” government debt dynamics, the IMF is digging in its heels in favor of waiting till after a summit meeting of eurozone officials to be held Oct. 23, in case officials come up with a plan to make Athens’ debt levels more sustainable.

Reuters reported that, despite pressure to release its evaluation of Greece’s finances before the meeting, the troika has held off; however, in a draft the joint group said, “The Commission services recommend the sixth disbursement to Greece to take place as soon as possible: as soon as the agreed prior actions on fiscal consolidation, privatization and labor market reform, which were announced by the government, have been legislated.”

It also pointed out that the economic downturn in Greece was considerably worse than expected, meaning growth forecasts for the midterm would likely need downward revision. However, although Greece would not meet its targets in 2011, it was expected to do so in 2012 thanks to additional steps being taken by Athens.

The IMF disagrees, though, taking the position that the EU is painting too rosy a picture. Unidentified sources within the IMF said variously, “The IMF thinks that estimates by other parts of the troika are over-optimistic,” and “The IMF will definitely want to see what the Euro group and the European Council come up with first.”

One possibility is that the weekend meeting will require more involvement by private bondholders, making Greece’s debt more sustainable. That would mean a renegotiation of the rescue package agreed upon in July, and banks are reluctant to give further ground on increasing haircuts.

The IMF has held out its approval on loan tranches in the past, insisting that it be confident that a year’s worth of financing is sound, as a way to exert pressure on the Greek government to push through measures to reduce its debt. Greece has already received five tranches from the rescue agreed upon in May 2010; if it does not get the sixth tranche before the end of 2011, it could default.