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Victoria Mindova

"I do not think it is productive at this stage to talk about a reduction of the debt held by the official sector," the head of the Institute of International Finance Charles Dallara said in Athens. The debates about the unsustainability of the Greek debt have delayed the payment of the financial aid. The rumours of a second haircut of the Greek debt undertaken by the countries in Europe (OSI - Official Sector Involvement) have become more assertive, but are not confirmed by Brussels.

According to Charles Dallara, Greece’s problem currently is not the level of foreign debt but how the country will regain its economic growth to prevent the ongoing contraction of GDP. He explained that the debt would always be disproportionately high and unsustainable if the Greek economy contracted by 20% every three years.

"Clearly, here in Greece, Europe needs to find its own way to change the dynamics. Cutting interest rates on existing and prospective EU and IMF lending to funding costs would be a good place to start," Dallara said. He explained that lower interest rates would not burden European taxpayers further, but they would significantly reduce the financial burden for Greece.

Charles Dallara said that the extension of the programme by two years was a step in the right direction, but it was not enough to achieve stability.

Another important change that European leaders must make in order for Greece to emerge from the vicious circle of recession and measures is to ease the narrow time frame for the implementation of fiscal adjustment. He suggests that the goals for the reduction of the deficit should be changed.

Greece's fiscal programme assumes cuts to the amount of 4% - 5% per year. "What is needed instead is to ease the pace of the remaining fiscal adjustment to something closer to that to Ireland, which has been moving steadily with an annual reduction of 1.5% per annum."

The head of the Institute of International Finance highlighted the weaknesses of the Greek programme and the blame of international lenders in their inability to forecast the negative effect on the economy. He stressed that instead of 6.5% recession as anticipated in the initial plan, the economy has shrunk by 12% in just two years. Domestic consumption has decreased by 15% instead of 12% over the same period and  nemployment has reached 25% instead of 15%.

Dallara compared the current state of Greece with the crisis in Latin America before the Brady Plan. Then, the International Monetary Fund had to grant interest-free loans to troubled countries to stop the galloping recession. "I am not suggesting now that this approach should be applied in the euro area," the financier said, but reiterated that interest rates on assisting loans must be revised and reduced to allow stabilization. He stressed that assisting loans of zero interest rate are generally intended to rescue countries with very low income. "Should Greece get to this point?" he asked rhetorically.

"The moderate goals are achievable, they would have less negative impact on employment, as the experience of Ireland shows and they will have a positive effect on market confidence," Dallara said. He insists that the European Central Bank must become more responsive to the policies imposed in order to introduce new incentives to increase employment at the end of 2013.