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IMF: Europe needs private involvement in Greek crisis

Jul 13, 2011, 18:16 GMT

Washington - The International Monetary Fund (IMF) called Wednesday on Europe to end its bickering and finalize a deal to ensure private creditors' involvement in helping to solve the Greek financial crisis.

'The very public debate in Europe over this issue ... has been a major problem for securing confidence around the programme,' the IMF said in a report released in Washington.

The crisis lender suggested that heavily indebted Greece may need a second rescue package of 104 billion euros (147 billion dollars) through to mid 2014, with private creditors carrying up to 33 billion euros of the load and eurozone members the remaining 71 billion euros.

The release of the report comes ahead of a possible European leaders' summit on the debt crisis that has engulfed parts of the 17-member eurozone.

The report was delivered against the backdrop of moves among European leaders to draw up a second Greek rescue package, which could involve private creditors sharing the burden of the bailout on a voluntary basis.

The IMF report accompanied its release of 3.3 billion euros in emergency loans to Greece. To date, the IMF has distributed 17.4 billion euros of the current 110-billion-euro plan, set up forged by the IMF and European Union to contain Greece's fiscal crisis.

Poul Thomsen, chief of the IMF mission to Greece, told reporters that the IMF was not considering a second package.

In its report, the IMF said that 'comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing.'

But the Washington-based agency cautioned that the private-sector role could have a negative impact on Greece's credit rating, which makes it 'imperative' for euro members to find a way to guarantee liquidity for the Greek banking system.

One mechanism suggested by Thomsen would be the issuance of new collateral with up to 30 billion dollars of 'uncovered bonds' that would be guaranteed by the Greek government.

The IMF suggested that even with significant private involvement, Greece would unlikely regain private market access by early 2012, and said there may be a 'residual gap' of 70 billion euros through to mid 2013, when the programme ends.

All told, however, that sum could reach 104 billion euros by mid 2014 'if market access is further delayed.' The IMF suggested the gap could be filled with the 33 billion dollars from private investors, with delays on cashing in at maturity, and the remaining 71 billion euros from euro member states.

The IMF said the escalating debate had undermined the success of the current rescue programme, causing market sentiment to take a 'sharp turn for the worse' and leading investors to believe that Greece will restructure its debt.

Thomsen dismissed suggestions that the Greek rescue programme had fallen off track, noting that the Greek government had reshuffled its cabinet and gotten backing for the austerity programme demanded by the IMF and eurozone.

The IMF projected that the Greek economy would shrink by 3.75 per cent in 2011, instead of the 3 per cent earlier projected. But Thomsen emphasized that competitiveness was improving, and inflation had receded to 3.1 per cent in May, a level very close to the euro-area average of 2.8 per cent.

The European Commission on Wednesday confirmed that Greece was still its most problematic case. While financial market pressure on Spain, Portugal and Italy had eased, Greek 10-year bond yields remained high at 16.8 per cent.

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