European finance ministers and the International Monetary Fund agreed to a 110 billion euro rescue package for Greece over the weekend, but some fear that it may not be enough to avoid debt restructuring.

The IMF is lending the country 30 billion euros and countries in Europe are contributing another 80 billion euros in bilateral loans. In addition, the country has pledged to carry out a variety of measures to cut spending and try to boost revenues. Additionally, the Governing Council of the European Central Bank has agreed to suspend the application of the minimum credit rating threshold to the country’s debt.

“The Greek government has designed an ambitious policy package to address the economic crisis facing the nation. It is a multi-year program which begins with substantial up-front efforts to correct Greece’s grave fiscal imbalances, make the economy more competitive and — over time — restore growth and jobs. We believe these efforts, along with the government’s firm commitment to implement them, will get the economy back on track and restore market confidence,” said Dominique Strauss-Kahn, managing director of the IMF.

Fiscal policy and pro-growth measures are the two main pillars of the government’s program, he noted. “A combination of spending cuts and revenue increases amounting to 11% of GDP — on top of the measures already taken earlier this year — are designed to achieve a turnaround in the public debt-to-GDP ratio beginning in 2013 and will reduce the fiscal deficit to below 3% of GDP by 2014. Measures for 2010 involve a reduction of public sector wages and pension outlays — which are unavoidable given that those two elements alone constitute some 75% of total (non-interest) public spending in Greece,” he explained.

To boost growth, the Greece government has also promised reforms to labour market policies, better management of state enterprises, efforts to fight waste and curb tax evasion. “In addition, the government is taking decisive steps to strengthen and safeguard the financial system. A Financial Stability Fund — fully financed under the program — will ensure a sound level of bank equity,” Strauss-Kahn noted.

The board of directors of the Institute of International Finance released a statement supporting the deal, and pledging cooperation. It stressed that, “this ambitious adjustment effort would significantly enhance economic and financial prospects for Greece and should help to dispel uncertainties that have roiled global financial markets in recent months.”

“It will not be easy. But with strong and sustained implementation, the program and financial support package are well designed to address uncertainties regarding Greece’s fiscal and financial prospects. On that basis, and given the importance of contributing to the restoration of confidence and stability in the circumstances surrounding Greece, IIF board members have agreed to play their part in supporting the Greek government and Greek banks,” it said.
Economic research firm, IHS Global Insight, says that, “this is the last chance for Greece to avoid unprecedented (for an Eurozone country) debt-restructuring. However, these funds will not solve Greece’s problems. They will certainly help to ease liquidity pressures in the short run, but we have repeatedly mentioned that Greece’s real problems are structural and long-term. Greece does not have a liquidity problem, but a solvency one.”

IHS also points out that the aid package still needs to gain legislative approval in various countries, including the biggest contributor, Germany, where passage is not certain.

“The economy will contract sharply in 2010 and the imbalances present in the economy mean that growth is expected to be extremely weak over the medium term. Higher unemployment, significantly tighter fiscal policy, reduced availability of credit, and larger spare capacity levels mean that domestic demand — which had been the engine of growth during the past decade — will struggle for a considerable time. Moreover, a low savings rate, the relative lack of openness of the economy, and its very weak external competitiveness mean that the adjustment will be lengthy,” IHS says.

“Although the recent softness of the euro is a welcome development for Greece’s exporters, the only way to improve the external competitiveness of the economy in the short run is by reducing costs — for example wages — as Greece does not have control over its exchange rate. The Eurozone/IMF funds will give the economy some time to put its fiscal house in order and implement the measures needed to make the economy more competitive in the long run. However, this is not a certainty and there are still several inherent risks,” it adds.