Bloomberg News

Europe Said to Face IMF Doubts on Greek Aid Without Debt Cut

July 14, 2011

(Updates with IMF comments in seventh paragraph.)

July 14 (Bloomberg) -- European finance ministers are concerned that the International Monetary Fund will curb its share of a Greek rescue of as much as 115 billion euros ($163 billion) unless the plan includes deep cuts in Greece’s debt burden, two people with knowledge of the talks said.

A program that fails to generate a sustainable reduction in Europe’s biggest debt load may require governments to finance a bigger share of the three-year lifeline, said the people, who declined to be named because the talks are in progress. The IMF has provided one third of the three previous euro bailouts, including Greece’s in 2010.

Doubts over the IMF’s role represent an added obstacle in the effort by policy makers to stem a crisis that spread to Italy this week, increasing the urgency for a solution as yields soared to euro-era records in the most debt-laden nations.

“European policy makers still misunderstand market dynamics,” Royal Bank of Scotland Group Plc economists led by London-based Jacques Cailloux said in a research note. “We expect the crisis to continue deteriorating and threaten the entire euro area.”

Political leaders are at odds with each other and the European Central Bank over Germany’s demand that investors bear some of the burden even at the risk of Greece being declared in default. Bondholder involvement is the main hurdle to a second lifeline, the people said. Germany pressed to postpone a euro- area summit until that point is settled and the leaders can endorse a full package, they said.

Lagarde Comments

IMF Managing Director Christine Lagarde hinted at a harder line on a new Greek package in her first week in charge, telling reporters July 12 that “nothing should be taken for granted.”

The Washington-based lender stepped up the pressure today, calling for a “greater sense of urgency” in Europe, citing “increased market worries about potential contagion.”

Ireland was cut to junk by Moody’s Investors Service July 12, a week after lowering Portugal to below investment grade. Italy’s borrowing costs have soared to the highest since 1997.

IMF spokeswoman Conny Lotze declined to comment for this article, referring to remarks made on a conference call yesterday related to Greece by Poul Thomsen, the mission chief there.

While there is no request for a program yet, Thomson said, “of course we are thinking about what would be the need for financing going forward with or without a new program and what would our contribution.” He said that would depend upon what financing is provided by Europe and by the private sector.

Three-Year Need

European officials see Greece’s need over the next three years at 115 billion euros, including revenue from asset sales and creditors, the people said.

Greek debt has mushroomed since the first 110 billion-euro aid program was awarded last year, sending bond yields to record highs, leading the three major ratings companies to downgrade it to junk status and provoking speculation of an imminent default.

Greek debt, at 127.1 percent of gross domestic product in 2009, will rise to 166.1 percent by the end of 2012, the European Commission forecasts.

Lagarde, like her predecessor Dominique Strauss-Kahn a former French finance minister, inherited an IMF that has grown skeptical of Greece’s prospects of turning the economic corner.

Greece has “little scope for deviation” from budget cuts, asset sales and structural reforms, the IMF said in a staff report yesterday. Backsliding “would see debt remain at very high and likely unsustainable levels through 2020.”

Asset Sales

The size of the European and possible IMF stake in the next package also hinges on how much Greece raises by selling state assets. Government plans call for 50 billion euros in revenue from privatizations by the end of 2015.

Deputy Finance Minister Pantelis Economou raised doubts about that target, telling Greek lawmakers on July 11 that “we will sell a lot less than planned.”

Debt-reduction discussions shifted to Rome today with bank representatives and European officials testing the feasibility of a buyback program that would enable Greece to retire bonds at discounts of as much as 50 percent.

The Institute of International Finance, representing more than 400 banks and insurers at the Rome talks, put buybacks on the table after a French bond-rollover proposal failed to generate a targeted 30 billion euros in relief.

“Debt buyback operations could achieve a meaningful amount,” the IIF said in a July 10 position paper.

The French proposal is still up for discussion, as is an earlier German call for a debt exchange opposed by the ECB because it would prompt a “selective default” rating for Greece, the people said.

--With assistance from Rebecca Christie in Brussels and Sandrine Rastello in Washington. Editors: James Hertling, Craig Stirling

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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