IIF warns of risk from delaying Greek aid payments

BRUSSELS Mon Nov 12, 2012 9:27am EST

Institute of International Finance's (IIF) Deputy Managing Director Hung Tran massages his forehead during a meeting of finance ministers and central bankers from the Group of 20 top economies in Mexico City February 24, 2012. REUTERS/Tomas Bravo

Institute of International Finance's (IIF) Deputy Managing Director Hung Tran massages his forehead during a meeting of finance ministers and central bankers from the Group of 20 top economies in Mexico City February 24, 2012.

Credit: Reuters/Tomas Bravo

BRUSSELS (Reuters) - The longer it takes to agree further aid for Athens, the more damage is done to the Greek economy, a senior bank industry representative has warned, flagging a growing sense of alarm about a renewed threat of default.

"The longer you take over these negotiations about paying financial aid, the longer you starve the economy of the required liquidity," said Hung Tran, deputy managing director of the Institute of International Finance, a global bank lobby group.

"The current situation represents a risk for everyone," he told Reuters in a telephone interview.

"If Greece were to default and be forced out of the euro, the potential contagion risk to the other member states, the euro area and the wider economy would be significant."

The remarks from the group that negotiated an earlier, private-sector restructuring of Greek debt that handed heavy losses to investors come ahead of a meeting of euro zone finance ministers which will discuss further payments of financial aid to Greece.

Ministers are not expected to sign off on a fresh loan tranche to Athens on Monday because they need first to determine if the country's debts are manageable in the long term.

Greek debt is forecast to reach almost 190 percent of economic output next year and members of the troika representing international lenders - the International Monetary Fund, the European Commission and the European Central Bank - cannot yet agree on how to make it sustainable.

However, the lenders are in agreement that Greece, which will see its sixth year of recession in 2013, needs at least two more years to reach a primary budget surplus that would help put its debt on a downward path.

"The more you negotiate without coming to a conclusion, the more you hurt the economy," said Tran, who also criticized the emphasis put on cutting Greece's debt rather than stimulating economic growth via investment.

"Focusing exclusively on reducing debt is self defeating and puts both official sector and private sector creditors at risk," he said.

"It doesn't matter if in five or ten years' time the value of their debt is x or y. They need financing now to get their economy out of a downward spiral. We need a demand shock to offer people some glimmer of hope."

The IIF's Tran, who worked closely on the earlier debt restructuring, said any further cuts to Greece's debts should come from public-sector lenders. These include governments and central banks, none of which are keen to write down the value of loans.

"The holding by the private sector now accounts for less than one third of Greek debt," he said. "Any further meaningful reduction in the debt has to come from the official sector."

Greece must redeem 5 billion euros in Treasury bills coming due on November 16. Because the EU and IMF have not yet released a new aid tranche, the finance ministry has said it will issue new bills that will cover the outstanding amount at an auction on Tuesday. (Reporting By John O'Donnell; Editing by Toby Chopra)