Greece has made a 'strong start' cutting its debt, says IMF

Greece has made a strong start getting its finances in order but the government risks being over complacent about its ability to grow the economy in the medium term, according to a report from the International Monetary Fund.

In May, the eurozone members and the IMF agreed a €110 billion (£95 billion) three-year bail-out package to stem a sell-off in European government bonds just weeks before Greece had to repay €11.5 billion worth of its borrowing.

But the money was granted in exchange for far-reaching spending cuts and led to violent protests on the streets.

The IMF granted a second payment of about €2.5 billion to Greece on Friday and the EU will hand over another €6.5 billion reflecting the positive start the debt-ridden country has made in cutting spending.

But the IMF's report said they had to warn the Greek government not to be too complacent about the ability of the country's informal economy to keep the country growing in the future.

The report emphasized that those cushions are unlikely to be supportive of economic activity in a sustainable way, and that there could be downside risks to growth, especially over the medium term given the still weak competitiveness position and external environment.

The IMF progress review said Greece has met the June targets set as a condition of receiving IMF and EU cash but there were some areas of disappointment including the lack of support from opposition parties and the slow pace of spending cuts at the regional level.

The staff warned 'risks exist on the revenue outlook as the economy will be contracting, and spending is not under full control in sub national entities of government.'

But despite the stringent cuts the IMF said the recession in Greece is unfolding in line with expectations although inflation is higher than expected from indirect tax hikes.

It said liquidity in the banking system is tight but adequate, supported by the European Central Bank's support and pension and labour market reforms have been implemented ahead of schedule.

Concerns about the high level of debt ion Greece and other peripheral European nations such as Spain, Portugal and Ireland had led to fear of a new banking crisis and some market watchers fear that these worries could re-merge later this year.