IMF, EU Press Greece on Reforms

The Wall Street Journal

Updated October 9, 2012, 5:41 a.m. ET

By RIVA FROYMOVICH, MATINA STEVIS and GEOFFREY T. SMITH

LUXEMBOURG—Greece's official creditors failed to make any visible headway Monday in averting the country's looming debt crunch, drawing a diplomatic veil over suggestions of heated exchanges at their latest meeting.

International Monetary Fund Managing Director Christine Lagarde and European Union officials praised the government of Prime Minister Antonis Samaras for taking politically courageous decisions to bring the country's debt under control, but Ms. Lagarde said Greece must do more "on all fronts" before they could consider paying out the next vital tranche of €31 billion ($40.2 billion) in aid under Greece's bailout program.

Jean-Claude Juncker, who leads the regular meetings of euro-zone finance ministers, told a joint news conference that the creditors want the Greek government to complete a "substantial" list of budget measures and reforms by Oct. 18, when EU heads of governments will next meet.

The continuing impasse on the Greek issue overshadowed an otherwise optimistic meeting of the euro zone's 17 finance ministers, which saw the approval of more aid to Portugal and a broad endorsement of the tough budget announced last week by Spain's government.

Some observers saw that budget as the prelude to a request for a full-blown aid package, but Spanish Finance Minister Luis de Guindos again gave no hint of any such action being imminent.

"Greece is doing a lot," said Ms. Lagarde. "There is no question about it. But action is action…The list of prior actions has to be completed."

"Prior actions" is the creditors' phrase for the spending cuts, tax increases and other reforms that the previous Greek government had promised before two elections in quick succession paralyzed the political process for much of the year. Those actions are also likely to exacerbate in the short run a recession that is already much worse than the creditors expected earlier in the year.

On Friday, the Greek statistics office Elstat cut its estimate of economic output for the last two years. Officials at the meeting told The Wall Street Journal on Monday that the IMF now fears Greece's public debt could be as high as 150% of economic output by 2020 in the worst case, up from an earlier estimate of 147%. Under its statutes, the IMF can't lend to a country that doesn't have a credible path back to stable debt over the medium term.

"Before we agree to the next steps, we must await the Troika report and we need to be sure that Greece is implementing the measures," Dutch Finance Minister Jan Kees de Jager said after the meeting. He noted that Greece still has room to cut civil servants' pay, and still spent more on defense than other euro-zone members.

Before the meeting, there had been speculation that the creditors may pay out a part of the €31 billion aid tranche even before Greece has done everything they are asking of it, afraid of triggering a financial collapse as its cash reserves are depleted. Mr. Samaras has said the government's reserves will run out by the end of November.

European economics Commissioner Olli Rehn said such speculation was "premature" but declined to rule out the possibility completely. French Finance Minister Pierre Moscovici said splitting the Greek loan disbursement wasn't an option.

Speaking to reporters after the meeting, Greek Finance Minister Yiannis Stournaras said he believes all three official lenders were prepared to give Greece an extra two years to meet its budget targets at an estimated cost of €12 billion. He said it was an "underlying assumption" that this would happen.

He said Greece would do nothing to "jeopardize" the next installment of its bailout package.

Monday's meeting, which was also attended by European Central Bank President Mario Draghi, led to no further signs of pressure on Spain to make use of the euro zone's new financial backstop, the €500 billion European Stability Mechanism that came into force Monday after months of political tos and fros.

German Finance Minister Wolfgang Schäuble, whose government is reluctant to ask parliament for more funds for Spain so soon after approving its €100 billion bank recapitalization deal in the summer, said Spain is on the "right path" both in reducing its current-account deficit and its unit labor costs.

"Spain doesn't need any aid program. That's what the government says again and again and we should simply trust the Spanish government," he said.

France and Germany advanced in their bid to find nine EU member states to back a European financial transactions tax. Greece became the seventh country to sign up Monday, its government confirmed. France's Mr. Moscovici predicted there would "potentially" be nine countries ready to back the tax at Tuesday's meeting of EU finance ministers.

Tuesday's meeting will also see EU finance ministers discuss new capital requirements for the region's banks. Ministers are also likely to renew the debate over how quickly a new euro-zone bank supervisor can be established.

Write to Riva Froymovich at riva.froymovich@dowjones.com, Matina Stevis at matina.stevis@dowjones.com and Geoffrey T. Smith at geoffrey.smith@dowjones.com