Greece nears IMF/EU deal and dismisses drachma talk

ATHENS Wed Jun 1, 2011 3:52pm EDT

People walk past the Bank of Greece in Athens May 9, 2011. REUTERS/Yiorgos Karahalis

People walk past the Bank of Greece in Athens May 9, 2011.

Credit: Reuters/Yiorgos Karahalis

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ATHENS (Reuters) - Greece should complete talks by the end of the week with EU and IMF inspectors on a medium-term budget plan plus a vital next slice of international aid, sources close to the negotiations said on Wednesday.

Greek Prime Minister George Papandreou will meet the chair of the Eurogroup gathering of euro zone finance ministers Jean-Claude Juncker in Luxembourg on Friday at 1300 GMT, Athens said as the European Union seeks to reach a new deal to avoid a Greek default.

Papandreou and Juncker will discuss the EU/IMF inspectors' review of Greece's progress on its fiscal consolidation and privatisation path and a series of other issues regarding the debt-choked country, a Greek government official said without giving any other details.

Inspectors on the "troika" team from the European Union, IMF and European Central Bank are in Athens to decide whether to release a tranche of 12 billion euros this month to keep Greece afloat. Partly due to IMF demands, discussions on a new package that would meet Greece's needs up to 2014 are also taking place.

Asked when the review would be concluded, one source said: "Tomorrow if we are lucky, but it could also be Friday."

A German finance ministry spokesman said Berlin expected the troika to report on Friday evening at the earliest and that Germany expected the EU and International Monetary Fund to remain involved jointly in any continued aid program.

Sources said that whether Athens gets the fifth tranche of aid under its existing 110 billion euro EU/IMF bailout will depend on senior EU finance officials who are gathered in Vienna and on euro zone finance ministers, who may meet earlier than their next scheduled talks on June 20.

European officials are holding talks in the Austrian capital to sketch out options for a second bailout package, with private sector participation still under discussion to help relieve the country of its massive debt burden.

A Greek source with knowledge of the Athens negotiations was optimistic that Greece would get the latest slice of money to cover its budget deficit and meet debt repayments.

"There will be a way for the disbursement of the fifth installment to be approved," he told Reuters. "The new assessment will include measures to speed up privatizations, to cut spending and increase revenues."

A new package for Greece, expected to total around 65 billion euros according to EU officials, could involve a mixture of collateralized loans from the EU and International Monetary Fund, and additional revenue measures.

It could involve unprecedented intrusive external supervision of the privatisation program, which has yet to sell anything since the rescue a year ago.

However, a European source said the troika's remit did not include plans for a privatisation agency modeled on one which sold East German state enterprises after the fall of communism.

"This is a question that should be dealt with at a political level, not at the level of officials," the source said, adding that this may not be resolved this week. "It depends on the Greek authorities, whether they ask for technical assistance."

"IMPROBABLE AND RIDICULOUS"

Greece's plight has prompted some comment that it should leave the euro zone rather than continue spreading its problems to other countries in the bloc through market "contagion."

Central bank Governor George Provopoulos dismissed such a scenario when he unveiled a report analyzing the impact of climate change on Greece's economy in the next 90 years.

This report "is a clear answer to various improbable and ridiculous scenarios making the rounds recently. I remind you that all the calculations on the cost-benefit analysis contained in the report are in euros," Provopoulos, who is also an ECB Governing Council member, told a conference.

A member of the junior party in Germany's coalition government called on Tuesday for Greece to exit the euro zone, which it joined in 2001.

Having the euro means Greece cannot devalue its currency to make its economy more competitive. However, engineering a devaluation by resurrecting the drachma would massively increase the burden of its debt which would remain denominated in euros.

Data on Wednesday showed how the economy is suffering under the debt crisis and austerity measures already imposed by the state under the IMF/EU bailout.

Greece's manufacturing economy shrank at its fastest pace in three months in May, with weak domestic demand forcing firms to cut jobs and prices, a PMI survey showed.

Gross domestic product is seen shrinking 3.0 percent this year after a 4.5 percent decline in 2010.

Greek labor unions say austerity policies are stifling the economy and the country's main private sector union said on Tuesday it would stage a 24-hour general strike on June 15.

(Additional reporting by Lefteris Papadimas and Renee Maltezou in Athens and Christiaan Hetzner in Berlin; writing by David Stamp; Editing by Andrew Hay)

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