IMF says Europe must dig deeper to tackle debt crisis

Reuters News
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Posted: May 20, 2011 1:24 PM
IMF says Europe must dig deeper to tackle debt crisis

By Carmel Crimmins and Paul Carrel

DUBLIN/HAMBURG (Reuters) - The International Monetary Fund called on Europe on Friday urgently to agree a more comprehensive sweep of measures to tackle the bloc's debt crisis, stumping up more money to keep countries afloat.

A senior European Central Bank policymaker offered a jarring contrast, saying the onus was on Greece to sort its mess and that if it failed, further support could not be taken for granted.

Disagreements within Europe on how to tackle Greece's growing debt problems have sent investors running for cover and a senior IMF official, using unusually strong language, said the bloc needed to demonstrate to markets that it stood fully behind struggling euro zone members.

Ajai Chopra, the head of the IMF mission in Ireland, said Europe needed to upgrade its bailout fund, the European Financial Stability Fund (EFSF), as a matter of urgency.

"The countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible," Chopra said in a conference call dealing with Ireland's progress under its EU-IMF bailout.

"The magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and hence debt restructuring is off the table."

New Bundesbank chief Jens Weidmann could scarcely have taken a more different stance, warning Athens -- bailed out last year to the tune of 110 billion euros -- that it could be left out in the cold if its fiscal adjustment program slipped off track, as EU officials fear.

"It is first and foremost up to Greece itself to take appropriate additional steps," Weidmann said in his first public comments on the Greek debt crisis.

"If a country fails to do so, further support should no longer be taken for granted and the country should be prepared to bear the severe consequences that are likely to ensue once financial assistance is withdrawn," he said.

He repeated an ECB warning -- delivered by President Jean-Claude Trichet to euro zone ministers this week -- that any form of Greek restructuring would lead to its banks being cut off from the central bank's liquidity lines.

Chopra, on the other hand, said continuing ECB liquidity support for countries with banking sector problems was critical.

Fitch ratings agency offered an equally dire warning after it downgraded Greece's sovereign debt to B+ from BB+, pushing it further into junk territory.

"An extension of the maturity of existing bonds would be considered by Fitch to be a default event and Greece and its obligations would be rated accordingly," it said in a statement.

The ECB has warned for weeks that a restructuring would have catastrophic consequences for the euro zone and stepped up its rhetoric this week after Eurogroup Chairman Jean-Claude Juncker suggested the bloc was open to a voluntary extension of Greek debt maturities.

Euro zone sources said on Thursday a different way through was being explored, with governments considering a plan to prevent a Greek default under which private investors would be asked to maintain their exposure to its debt and Athens would receive a new package of EU/IMF aid in return for more austerity measures.

The euro fell to a session low against the dollar after Fitch downgraded Greece's credit rating.

"BANKS MAY NEED TO CLOSE"

Chopra said all euro zone countries needed to accelerate "repair and reform" of their financial sectors through rigorous stress tests.

"Stress tests need to be followed, where appropriate, with bank recapitalization and in some cases banks may need to be restructured or closed down," he said.

Europe and the Washington-based IMF are loaning Ireland 67.5 billion euros to prop up its banks and cover its sovereign funding needs after international investors shunned Dublin following revelations of huge property-related loan losses.

But Chopra said Ireland's problems were not unique.

"The problems that Ireland faces are not just an Irish problem they are a shared European problem that requires a shared solution."

He signaled IMF disapproval at French demands that Ireland should raise its low rate of corporation tax to get a cut in the cost of its European loans, something Greece has already secured.

"An increase in the corporate income tax is not a part of the EU-IMF supported program because we did not see such a tax increase as consistent with the overall goals of the program in restoring growth."

He added that the IMF decided what interest rate it charged on its loans through a single interest rate formula. "It's not a formula that gets negotiated by different countries," he said.

European leaders raced on Friday to nominate a successor for fallen IMF chief Dominique Strauss-Kahn before a G8 summit in France next week, with French Economy Minister Christine Lagarde in pole position.

(Additional reporting by Padraic Halpin, editing by Mike Peacock)