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Poul Thomsen, left, the director of the IMF's mission to Greece, arrives at the Greek Ministry of Finance, in Athens, on Monday.

Petros Giannakouris/AP

Greece has reached its limit in raising taxes and needs to refocus its austerity program on long-term spending cuts, the International Monetary Fund said Tuesday.

The warning came as the debt-shackled euro zone member heads toward its fourth year of recession, with revenues weakening despite draconian new emergency taxes.

"I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes," Poul Thomsen, the IMF mission chief in Greece, told reporters in a conference call.

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Mr. Thomsen, speaking about the IMF's latest report on Greece's progress, said the country's structural reforms have fallen "well short" of expectations. But he said it was too early to say whether new austerity measures would have to be taken next year.

Greece has relied on a €110-billion ($145-billion U.S.) bailout loan package from euro zone countries and the IMF since May, 2010, to stave off default. In return, it has taken a series of debt-reducing measures, including slashing salaries and pensions and imposing several rounds of tax hikes.

Greece's austerity program "has relied, in our view, too much on taxes and I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes," Mr. Thomsen said. "Any further measures, if needed, should be on the expenditure side."

Greece has consistently missed deficit reduction targets, and it quickly became clear that the initial bailout would not be enough to prevent a potentially catastrophic default that could drag down other euro zone countries and affect the entire global economy.

European leaders in October agreed on a second rescue deal worth €130-billion, with key details still being negotiated. Part of the deal includes provisions to write off 50 per cent of the value of Greek bonds held by private creditors, potentially cutting the country's overall debt by €100-billion.

Mr. Thomsen said the IMF has not been asked yet to join in the second rescue package. He would not comment on the bond-swap negotiations still under way, except to say the IMF was hopeful banks would have a "high participation" in the voluntary deal.

In its 161-page report, the IMF said successful efforts to reduce Greece's national debt to sustainable levels now hinged on "near-universal participation" in that bond swap deal.

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If the bond swap deal goes according to plan, it aims to reduce Greece's debt to 120 per cent of gross domestic product by 2020. However, if there is low participation by banks and other private creditors, the IMF warned, Greece's debt could stick above 145 per cent of GDP in 2020.

Greece's reforms have also been troubled by a lack of broad political support for the bailout program, Mr. Thomsen said. The country has also been rocked over the last year by frequent strikes and demonstrations, some of which have turned into riots.

However, a political crisis led to the appointment last month of an interim coalition government headed by a former European Central Bank governor, Lucas Papademos. With the country's two main political parties, plus a smaller nationalist party, now holding government seats, the situation has improved.

Mr. Thomsen and other international debt inspectors are currently in Athens to review Greece's finances. They will meet with the ministers of transport, development and labour on Wednesday, Finance Minister Evangelos Venizelos on Thursday, and Mr. Papademos and the finance minister on Friday.

Mr. Venizelos on Tuesday discussed ways of kick-starting the country's depressed economy with European officials.

Greece's budget performance has continued to slip with a deep recession unravelling the revenue gains from additional taxes. The central government's deficit from January to November this year widened by 5.1 per cent compared to the same period in 2010, reaching €20.5-billion from €19.5-billion last year, finance ministry preliminary figures showed.

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Separately, Greece raised €1.625-billion in the sale of 26-week treasury bills at a yield of 4.95 per cent, slightly higher than the 4.89 per cent interest rate from a similar sale last month.

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