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01 October 2023

Greece may not be able to avoid IMF

By Lesley Wroughton

If the European Union can't quell concerns over Greece's debt burden, the International Monetary Fund (IMF) may have to step in, whether or not its help is welcome.

German sources said on Tuesday European governments have agreed in principle to help Greece in what would be the first rescue of a eurozone member in the currency's 11-year history. But IMF insiders and analysts say that may not be enough to prevent investor concerns from spreading to other European countries.

Europe is still loathe to turn to the IMF for fear of stigma. But at the very least it could use the expertise of an agency that has handled countless debt crises and is already providing technical assistance to Greece.

Turning to the IMF, for many leaders, amounts to "capitulation to Washington, a total political abdication", said Paul de Grauwe, economics professor at Belgium's Catholic University of Leuven.

But deeper IMF involvement would provide some reassurance to skittish investors who are casting a wary eye towards other fiscally fragile countries such as Spain and Portugal that are also shouldering heavy debt burdens. The cost of insuring those countries' debt against default has soared in recent days. If the debt situation proves more dire than initially thought, Europe may need the IMF's financial firepower. "There is a high probability the IMF will need to step in to prevent contagion," an IMF board source said, before adding that Europe had made it clear it wanted to deal with the issue.

Greece's debt woes have raised pressure on the rest of Europe's currency zone to prove it can force Athens to take the painful measures required to clean up its public finances.

European policymakers and the IMF agree that Greece is unlikely to default, although the Greeks need to lay out a convincing strategy to regain control of expenditures and demonstrate they can stick to the plan.

European officials have also been adamant that they want to handle matters themselves.

"What's clear is that this is a matter for the Europeans," German Finance Minister Wolfgang Schaeuble told German media this week. "There is no doubt that Greece is not a question for the International Monetary Fund."

But there are concerns outside the eurozone that Greece's woes have already harmed the prospects of enlarging the eurozone, dealing a blow to Baltic states' ambitions of joining the eurozone.

Swedish Finance Minister Ander Borg said on Tuesday a discussion on a role for the IMF in dealing with the situation should not be "taboo".

Nordic countries contributed €1.8 billion (Dh9.10bn) towards an IMF-led bailout package in Latvia.

"Financial markets have signalled very clearly their discomfort with the situation unraveling in Greece and there is a risk of contagion to other countries," said Domenico Lombardi, President of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution.

"It is really a political decision and not a decision that the ECB [European Central Bank] can take the lead because there is no bailout clause in the ECB charter," said Lombardi. "This leaves a role for the IMF."

Lombardi, who is a former member of the IMF board, believes that getting the Fund involved would ease pressures from financial markets.

He said while the IMF could provide Greece with financial support through a precautionary arrangement, he acknowledged it would be politically easier for the IMF to monitor whether Greece honours its commitments on fiscal reforms through some form of "enhanced surveillance". Such an IMF "seal of approval" would help reassure markets, Lombardi added.

"The EU doesn't have a structure and a set of people who can do what the IMF does. And the IMF, for all its faults, is quite good at getting agreements and then getting people to stick to agreements," said Simon Johnson, former IMF chief economist.

How much money?

Publicly, the IMF's press line on Greece is that if asked by the European Union, the IMF will be willing to help Athens.

IMF chief Dominique Strauss-Kahn said last week that the fund was ready to step in, if needed.

That said, the former French finance minister is widely reported to be eyeing the French presidential election in 2012 that would pit him against President Nicolas Sarkozy, and riding to Europe's rescue would score political points.

Greece's borrowing capacity, as measured by its quota in the IMF, is only around $500 million (Dh1.83m), a drop in the bucket compared with the country's estimated shortfall this year of between $50bn to $70bn.

Meanwhile, reported estimates of a Greek bailout of between €23bn and €25bn are more based on the country's debt service coming due in May rather than on firm proposals by the IMF. (Reuters)


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