Germany, France back IMF role in Greece

Sabato 11 Feb 2012 11:13:26

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The shift toward an IMF role before an EU summit that starts on Thursday came a week after euro-area finance ministers agreed to a European framework for a bailout. German Chancellor Angela Merkel, who says her taxpayers should not pay for the region’s biggest budget deficit, then pushed for a greater IMF role. That reversal put her at odds with French President Nicolas Sarkozy, who called for an EU solution.

“It seems like a U-turn but it’s a sensible solution,” said Julian Callow, Chief European Economist for Barclays Capital in London. “The IMF brings credibility and transparency and anything that gives investors a degree of comfort is good. The situation has been from the outset that there is no European mechanism in place to deal with a situation like this. This is what the IMF is there for.”

With allies dropping their resistance to IMF involvement, Merkel agreed to sign on to a statement at the Brussels summit March 25-26 to create a mechanism to aid indebted members, including Greece, Die Welt reported on Tuesday. A government spokesperson denied that Merkel had agreed to an EU plan.

While German Finance Minister Wolfgang Schaeuble resisted IMF involvement, he told the Frankfurter Allgemeine Zeitung that turning to the Fund to help Greece “can and must only be an exception.”

Dangerous bond yields:

Greek Prime Minister George Papandreou has been urging EU allies to give details of an aid package to shore up investor confidence and bring down borrowing costs. Greece’s 10-year bonds now yield twice comparable German debt. That financing premium led Papandreou to say on March 19 that Greece, which needs to sell about 10 billion euros ($14 billion) of bonds in coming weeks, is a step away from not being able to borrow and may need to turn to the IMF if European aid isn’t forthcoming.

Merkel set three conditions for supporting EU assistance, another German official said on Tuesday on condition of anonymity. Aid would be made available only if Greece could not raise funds in financial markets, the IMF makes a substantial contribution and EU sanctions against deficit-limit violators are stiffened.

“The euro area’s ability to impose the rules that it already has have been inadequate,” David Mackie, chief European economist at JPMorgan Chase, said. “In some sense you have to bring someone in who does a better job of it. The existing rule book has failed otherwise we wouldn’t be in this mess.”

French pleas for a European package led Michael Meister, parliamentary group finance spokesman for Merkel’s party, to say in an interview: “If France wants an agreement on aid for Greece at the summit then it should go it alone and supply aid itself and not expect Germany to do the same.”

An ‘impossible’ situation:

Meanwhile, Paul Donovan, deputy head of global economics at UBS Investment Bank, said Greece will default on its bonds “at some point” as the euro region fails to deal with the crisis.

“I think it’s in an impossible situation,” said Donovan, who is based in London, in an interview with Bloomberg Radio on Wednesday. “Europe has failed to clear its first serious hurdle. If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work. It’s a bad idea.”

Greek Finance Minister George Papaconstantinou said that he expected “positive” results from Thursday’s summit and preferred a European solution for any potential aid. “We want to borrow with better rates and believe this will happen with the implementation of the deficit plan,” he said at a conference in Athens on Tuesday.

Greece is banking on wage cuts and tax increases to shave its budget deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the euro’s 11-year history. Papaconstantinou said that target is reachable even if the economy shrinks as much as 2 percent this year.

Bloomberg