Here’s Why the IMF and EU Paused Talks with Greece

Talks between Greek officials and international inspectors over Greece’s next tranche of aid unexpectedly came to a halt Friday, after the two groups disagreed over why and by how much Greece’s deficit-reduction programs, a condition of the aid package, had fallen behind schedule. The International Monetary Fund, one of the main contributors to Greece’s aid package, initially said it planned to wrap up discussions by September 5.

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Greek Finance Minister Evangelos Venizelos said talks have not been suspended and will resume September 14 after technical experts had time to study the relevant data. Greece’s economy is expected to contract by about 5% this year, necessitating further structural reforms as continuing recession in 2012 will affect its ability to hit its ability to hit its fiscal targets, according to Venizelos.

Thursday, the government and its international lenders announced that Greece would unable to meet its budget deficit target for the year, but have since disagreed on the extent of the failure, and who to blame. The EU/IMF inspectors feel Greece has not been pursuing reforms vigorously enough, but Greece blames the worse-than-expected recession for its inability to make progress, especially in privatizations and on labor and pension reforms. Venizelos says Greece is not considering extra austerity measures.

Since there are no benchmark Greek government bonds maturing in September, the country won’t be at immediate risk of default even if it does not get the 8 billion-euro rescue package this month, as planned. Most of Greece’s roughly 10 billion euros of maturing bonds and interest for this year won’t have to be paid until December. But Greece continues to generate large deficits, with the 2011 budget deficit expected to be at least 8.6% of GDP, well above the target of 7.6%, though Greece estimates its deficit at 8.1%. While Venizelos says most of that deviation is the result of the recession, Greece’s lenders say only a quarter of the budget deviation is due to the recession.

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