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Dutch finance minister and president of the Eurogroup Jeroen Dijsselbloem criticsed the IMF for being overly pessimistic in its evaluation of Greece's economic situation. Credit: Rijksoverheid.nl

The fund published a statement revealing that the its executive board is facing a rare internal split over how far Greece should go with future spending cuts and tax increases.

Disagreement on that same question has led to a deadlock among the bailout deal’s different stakeholders, raising the spectre of a Greek default and renewing fears the country could exit the euro.

In the report published yesterday, IMF staff predicted that Greece’s long term growth was set to continue at just under 1% of GDP. Also, they expect the country’s budget surplus to come in at 1.5% of GDP if the government passes reforms currently required by the bailout – well below the targeted 3.5%.

According to Reuters, Jeroen Dijsselbloem, president of the Eurogroup, said yesterday on Dutch television that he was surprised by the harshness of the fund’s conclusions. The group believes Athens can hit the 3.5% surplus target.  

Dijsselbloem reportedly described the IMF statement as outdated and unnecessarily pessimistic.

He added he would be prepared to further ease the repayment terms of Greece’s debt to its European creditors as long as the country continues to cooperate on reforms. However, he ruled out any debt forgiveness.

The IMF argues that Greece will fall short of the bailout’s “unrealistic” surplus target without further austerity measures beyond those already required by the deal. However, it does not believe Greece needs to achieve that target, and sees it as overly ambitious.

Without a relaxation of the target, or additional spending cuts and tax increases, the fund is refusing to join the bailout. This outcome is desired by Greece’s European creditors because it would give the bailout much-needed credibility.

A spokesperson for German finance minister Wolfgang Schäuble said earlier this week that if the IMF pulls its participation in the negotiations altogether, “then the [bailout] programme is over”.

Germany is one of Greece’s biggest lenders, and is seeking IMF endorsement amid faltering support for the bailout at home. However, it is resisting the additional debt relief measures also demanded by the fund.

Meanwhile, in Athens, a fatigued government is rejecting IMF calls for further austerity. Years of pushing through harsh cuts, which have hit the Greek population hard, have seen the government’s popularity plummet in the polls.

A spokesperson for the government, Dimitris Tzanakopoulos, said that the government has expressed “categorically” that it does not intend to yield to the IMF’s “illogical demands”.

A meeting of eurozone finance ministers tomorrow will be critical in establishing whether the increasingly hostile impasse can be broken in time. Greece is due to repay €10.5bn worth of its debt in June, and the ongoing dispute is blocking the release of further bailout funds needed to cover the payments.

Failure to reach an agreement could mean a default for Greece and spell renewed risk that the country could exit the euro.

The rift, and its possible consequences, has spooked investors. Yields on two-year Greek government bonds have hit 10%, with 10-year yields at above 7.8% – the highest since November.