The IMF warned on Wednesday that Greece’s drive to shore up its troubled finances would fail unless it sharply accelerated reforms, and the ECB hit back at suggestions a debt restructuring might be the solution.
European finance ministers broke a taboo this week and acknowledged for the first time that some form of restructuring might be required to ease Greece’s debt burden, which at 150 per cent of annual output is among the highest in the world.
They have said they could ask private creditors to agree to a voluntary extension of the maturities on their Greek debt but have also made clear that the priority is to ensure an acceleration of Greek reforms.
“The program will not remain on track without a determined reinvigoration of structural reforms in the coming months,” Poul Thomsen, an IMF envoy who is monitoring Greek economic progress, told a conference in Athens on Wednesday.
“Unless we see this invigoration, I think the program will run off track,” he said, in one of the strongest warnings to Greece since it sealed the rescue one year ago.
Prime Minister George Papandreou’s government has struggled to rein in rampant tax dodging and is under acute pressure to begin selling off state assets to help Greece meet fiscal targets tied to last year’s €110-billion EU/IMF bailout.
Under its rescue terms, Athens is charged with reducing its budget deficit to 7.6 per cent of GDP this year. Thomsen said that without further measures Athens would not be able to get it much below 10 per cent.
The euro struggled to hold onto gains against the dollar and the cost of insuring Greek debt against default rose on Wednesday amid continuing talk of a restructuring.
Euro zone ministers have not spelled out how what they refer to as a “reprofiling” of Greek debt would work. Convincing private holders of Greek bonds to voluntarily accept later repayment could be difficult and require costly guarantees to avoid a hit to banks.
Such a move would buy Greece more time but not reduce its overall debt burden. Many economists believe it would be followed by a more aggressive restructuring involving “haircuts”, or forced losses, of 50 per cent or more from 2013, when policy makers have said they could opt for radical steps.
The European Central Bank, which holds up to €50-billion in Greek sovereign bonds on its own books, has warned that even a “soft restructuring” would put the stability of the euro zone at risk, reiterating that message on Wednesday.
“I’m opposed to soft restructuring because I don’t know what it means. Nobody knows what it means,” Lorenzo Bini-Smaghi, a member of the bank’s executive board, said in Milan.
Speaking in Athens at the same conference as Thomsen, ECB board member Juergen Stark warned policymakers against pursuing any form of restructuring, saying it was an “illusion” to think such a move would resolve Greece’s problems.
ECB vice-president Vitor Constancio warned of “enormous consequences” from a restructuring and said it should only be done as a last resort.
European politicians, however, are under pressure from angry taxpayers to broaden out the burden of their bailouts to include the banks that have bought up Greek debt in recent years.
But they have pledged not to force any losses on private holders of Greek debt before 2013, when a new anti-crisis facility – the European Stability Mechanism (ESM) – is due to take effect.
Before that, any burden-sharing must be done on a voluntary basis, they have said.
Euro zone countries, together with the IMF, bailed out Greece and Ireland last year, and approved a new €78-billion rescue for Portugal on Monday.
“During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors’ decisions. That is inadmissible,” German Finance Minister Wolfgang Schaeuble said in a speech in Brussels.
“It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future,” he added.
Because Greece is not expected to be able to return to the capital markets next year, as envisioned under its 2010 aid package, it faces a €27-billion funding gap next year.
This could be filled by additional money from the EU and IMF, stronger Greek privatization revenues and/or through some form of debt relief – either looser terms on the EU’s loans or maturity extensions for private creditors.
Jean-Claude Juncker, who this week became the first euro zone official to openly acknowledge some form of restructuring might be needed, told Austrian radio on Wednesday that if Greece needed relief the bloc would need to act.
“If all this happens we will have to address the issue of whether a light restructuring of Greek debt could be pursued in which maturities are lengthened, with respect to debt servicing, and interest rate levels (on EU loans are reduced),” he said. “Greece must not be allowed to become a black hole.”
But European governments do not appear to be united behind the idea of a restructuring, no matter how soft it is.
Greece’s Papandreou said late on Tuesday that the costs of a restructuring would “far outweigh any potential benefits” and vowed to launch a “full fledged attack” against tax evasion to meet the terms of the country’s rescue package.
Article provided via the Globe and Mail
http://www.theglobeandmail.com/report-on-business/economy/imf-issues-stark-warning-to-greece/article2026239/
" Race to replace IMF head takes a wider path "..
" the best person available should get the job, and if that person is from an emerging economy or from Canada, I think that's the person who should be chosen " ...
As Dominique Strauss-Kahn sits in a New York jail cell awaiting his day in court, furious political jockeying is already under way to pick his successor.
Key European countries are insisting on maintaining the 65-year-old tradition of handing the top job at the International Monetary Fund to one of their own – particularly now that the fund is grappling with the debt woes of several euro zone members.
Brazil and other emerging economic powers, meanwhile, argue that the time has come for the stodgy Washington-based institution to break with the past and appoint someone from the developing world.
And some prominent Canadians, including former prime minister Paul Martin, say the job should go to the best candidate from anywhere in the world, pushing Bank of Canada Governor Mark Carney on to the IMF short list.
“The best person available should get the job, and if that person is from an emerging economy or from Canada, I think that’s the person who should be chosen,” Mr. Martin said in an interview.
If fundamental change is on the way, replacing Mr. Strauss-Kahn, who sits in a New York City jail on sexual assault charges, could be a prelude to a broader reshuffling of the global financial order – one that gives more influence to fast-growing and important economies in Asia and South America.
Several key jobs are up for grabs over the next 12 months, including World Bank president, a job that has always gone to an American. Robert Zoellick’s term there ends next year. The No. 2 job at the IMF, also traditionally held by an American, opens up in August with the scheduled departure of John Lipsky, who this week stepped into Mr. Strauss-Kahn’s job on an interim basis.
“The leadership selection system is a problem and is about to change from one where countries or regions have traditionally been entitled to the top spot, to one base on merit and a global selection system to find the very best person,” said Wendy Dobson, the co-director of the Rotman School of Management’s Institute for International Business and a former associate deputy minister at the finance department.
Indeed, there was an understanding among the major powers that control the IMF when Mr. Strauss-Kahn, a 62-year-old former French finance minister, became managing director in 2007 that future appointments to these powerful and prestigious jobs shouldn’t solely be Americans and Europeans, Mr. Martin said.
“There was a tacit understanding that the selection of the next IMF head should be based on merit, and no one should be excluded,” said Mr. Martin, who sits on the IMF’s Western Hemisphere Advisory Group. “The strength of the opinion that it should be an emerging economy or a country like Canada has actually grown since the time of Strauss-Kahn’s appointment.”
John Manley, a whose own ambitions to become NATO Secretary-General were thwarted by European objections, said the Harper government should be making a strong pitch for Mr. Carney.
“This is a unique circumstance,” said the former deputy prime minister, who now heads the Canadian Council of Chief Executives. “I’d love it if we were promoting Carney for that position. I think it’s a long shot, but I think he’d be a great credit to Canada, and a very important contributor to the IMF if he could get it.”
There is mounting pressure to keep the status quo. Already, Germany and Belgium have made it clear they want another European. And the French are pushing Christine Lagarde, the country’s respected Finance Minister. There are “good reasons” for Europe to keep the post in the middle of the euro area’s debt crisis, German Chancellor Angela Merkel told reporters in Berlin.
Mr. Martin dismissed the “crisis” argument, saying the IMF is a “truly global” organization in the wake of recent changes to its ownership structure that gave developing countries more clout and more financial responsibility. And the top job should reflect that, he said.
“At the time of the Asian financial crisis, no one suggested it should be a Korean. At the time of the Latin American debt crisis, no one said it should be from that region,” Mr. Martin pointed out.
Like Mr. Martin, prominent Brazilians say they strongly believe the time has come to break up the U.S. and European monopoly. “There are many good Americans and Europeans, but if an equally strong candidate can be found from emerging-market countries, why not go for change?” Celso Amorim, a former Brazilian foreign minister, told reporters Monday in New York.
When the IMF was created in 1946, there was a dearth of international banking expertise outside the U.S. and Europe. That’s no longer the case. There are numerous suitable candidates from countries such as Brazil, Mexico, Turkey and elsewhere who should be given a shot at the job, said Steven Dunaway, a former top IMF executive from the United States who is now an adjunct fellow at the Council on Foreign Relations.
The IMF has had 10 managing directors since 1946 – four from France, two from Sweden, and one each from Spain, Germany, Belgium and the Netherlands.
Mr. Dunaway said Canada has “done a good job of establishing an independent view” from the Europeans and Americans, and that would make Mr. Carney an ideal candidate.
In spite of all the buzz about shifting power to the emerging economies or Canada, the decision is unlikely to be the open, transparent process Mr. Martin and others want, according to Mr. Dunaway. He said the leadership of the IMF and the World Bank will be decided through “political agreement, behind the scenes.”
“The advanced economies will have a major say at the end of the day,” he said.
Article provided via the Globe and Mail
http://www.theglobeandmail.com/report-on-business/international-news/race-to-replace-imf-head-takes-a-wider-path/article2025709/
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