Bloomberg News

IMF Sees Serious Risk of Greek Contagion Even If Default Averted

July 19, 2011

(For more on Europe’s debt crisis, see EXT4.)

July 19 (Bloomberg) -- Greece’s sovereign-debt crisis risks infecting the rest of the euro region even if officials avert a default, threatening the global economic recovery, the International Monetary Fund said.

Both the European Commission and the European Central Bank “considered that a sovereign default or a credit event would likely trigger contagion to the core euro-area economies with severe economic consequences,” according to an IMF staff report on the region’s economy. “Staff however also saw serious risks of contagion, even under a strategy which tries to avoid default or credit events.”

German Chancellor Angela Merkel said today that the crisis can’t be resolved in “one spectacular step” at this week’s European leaders’ summit on July 21. Government chiefs are meeting for the second time in a month, aiming to break a deadlock over a new Greek rescue that has spooked investors. Spanish and Italian bond yields surged yesterday, piling pressure on officials to end the turmoil.

“Despite adjustment efforts and support from euro-area member states and the ECB, market participants remain unconvinced that a sustainable solution is at hand,” the Washington-based fund said.

An intensification of the debt crisis, “especially if stress were to spread to the core euro area, could have major global consequences,” the IMF said in a separate report. “This is supported by financial market signals” and “thus, decisive further policy actions to contain the crisis are critical not only for the euro area itself, but also from a global perspective.”

EU Disagreement

European leaders are at odds with one another and with the ECB over demands by Germany and Finland that private investors bear some of the burden of a new Greek bailout.

The IMF said leaders need to “scale up the capacity” of the region’s rescue fund and make it more flexible.

“We would really advocate the crisis management facilities to allow interventions in secondary markets, provide guarantees, backstops for other fiscal agents and for banks if necessary,” Luc Everaert, division chief for euro area policies in the IMF’s European Department, said on a conference call with reporters.

Everaert also said European Union authorities must clarify their approach on private sector involvement and need stronger economic governance.

“We need fiscal disciple and it will be unavoidable to subordinate some fiscal sovereignty for the common good,” Everaert said.

Meeting Delay

A summit was originally mulled for last week before being postponed amid German fears it would backfire without a pact on private-sector involvement. Germany’s government says no extra aid is possible without bondholders staying exposed to Greek debt. By pushing for a voluntary rollover of Greek debt that risked pushing Greece into technical default, Germany also incurred the wrath of the ECB.

ECB President Jean-Claude Trichet told the Financial Times Deutschland in an interview published over the last weekend that Europe can surmount the crisis and the euro remains “a highly credible currency.” He reiterated that the ECB will not accept bonds from a nation that defaults as collateral.

--Editors: Kevin Costelloe, Fergal O’Brien

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net. Chris Wellisz at cwellisz@bloomberg.net


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