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IMF seeks to increase safety net as Greek talks drag on

Date: Friday 03 Feb 2012

IMF seeks to increase safety net as Greek talks drag on

As Greece continues talks with private creditors in an attempt to reach a deal on the debt swap, the International Monetary Fund (IMF) is busy making moves to increase its emergency funds in order to head off any possible crisis.

“Talks to boost the regional firewall and the global firewall in terms of the IMF's financial base need to proceed in parallel,” IMF Deputy Managing Director Naoyuki Shinohara told Reuters in an interview.

While members of the IMF recognise the danger that an implosion of the Eurozone could have on the global economy, they are reluctant to foot the bill unless those self-same European countries step up to the plate and also offer funds.

The IMF itself calculates that about $1 trillion will be needed to stave off the Eurozone debt crisis. Shinohara said half that amount should come from the IMF, while Europe would provide the other half. The old world already plans to implement the €500bn European Stability Mechanism (ESM) rescue fund that should replace the current European Financial Stability Facility (EFSF) next July.

At hand is how much each country would contribute to the IMF war-chest. “Countries, including emerging nations, understand the need to boost a global institution such as the IMF at a time when Europe's problems could affect countries outside the Eurozone in a major way," Shinohara said.

GREECE STILL UP IN THE AIR

Meanwhile, the deal between Greece and its private creditors continues to drag on. Greek Finance Minister Evangelos Venizelos said yesterday that the European Central Bank (ECB) needs to play its part and share the restructuring burden, an idea Germany openly opposes. Yet it remains to be seen whether the ECB might at least forego the profits on its Greek debt holdings.

Meanwhile, EU Commissioner for Economic and Monetary Affairs Olli Rehn repeated predictions made by other European officials that a deal would be reached “by the end of the week”.

This step would be necessary to accomplish what is understood in the financial media as being the European finance ministers’ goal of signing off Monday on the second financing package for Athens worth €130bn. This would require not only an agreement on the Greek debt swap, but also on new reforms that Athens would undertake to reduce its deficit.

At the same time, a Greek Finance Ministry official told Reuters today that the country’s deficit for 2011 would clock in at 9.1% to 9.4% of gross domestic product (GDP), below the previous estimate of “above 9.5%”. According to this source, the improvement is due to a higher-than-expected collection of property tax revenue.

In any case, Nobel economics laureate Paul Krugman thinks it’s a moot point. “The Greek situation is essentially impossible. They will default on their debt. In fact they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not,” he said.

JM

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