The European Union's "troika" mission to Greece recommends paying out a sixth aid tranche as soon as possible despite finding "extremely worrying" government debt dynamics, according to a draft of its long-awaited report obtained by Reuters on Thursday.
The draft said Greece's economic downturn was significantly stronger than expected, its debt sustainability had deteriorated from a few months ago and mid-term growth forecasts might need to be cut. However, additional government measures on income and spending would enable Athens to reach its deficit targets in 2012, though not in 2011.
The European Commission report was prepared in coordination with the European Central Bank but not with the International Monetary Fund, the other member of the troika, which is preparing a separate report.
The report recommended the aid be paid "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."
The inspectors wrapped up their review of Greek finances mid-month saying Athens was likely to receive an 8 billion euro aid tranche it needs to stave off bankruptcy in early November.
The troika said previous assessments that Greek economic growth would be close to 3 percent a year from 2015-2020 would be "viable only in the case of a pronounced acceleration of structural reform efforts, including privatization."
It pointed to deficiencies and delays in implementing fiscal reforms. But it said the additional measures "bring the 2012 deficit projection in line with the agreed ceiling, but the 2011 fiscal gap will not be fully closed."
Greece's financial sector remains fragile as liquidity is being squeezed, deposits are still contracting and Greek banks are highly reliant on borrowing from the central bank.
"Government debt dynamics remain extremely worrying," said the draft report, adding that debt levels would remain high "for many years and would be vulnerable to adverse shocks."
"When compared with the outlook of a few months ago, the debt sustainability has effectively deteriorated," it said, citing delays in recovery and reforms "as well as the perspective of bank recapitalizations."
Athens would miss targets for privatizations by at least a quarter, partly because of red tape but also because market conditions have deteriorated in the last quarter, especially on the Athens stock exchange.
"A delay of at least a quarter compared to previous plans is, thus, likely," it said.
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