Thursday, May 26, 2011

IMF Threat to Withhold Greek Aid Alarms Capitalist Markets

IMF threat to withhold Greek aid spooks markets

11:49am EDT

Juncker says IMF may not be able to pay June Greek aid
IMF spokeswoman confirms seeking EU funding guarantee
IMF chief economist: Greek restructuring not inevitable
Greek PM calls new talks with opposition on reforms
Schaeuble says debt restructuring very risky

By Axel Threlfall and Renee Maltezou

(Reuters) - The International Monetary Fund may withhold the next slice of aid to Greece due next month, the head of euro zone finance ministers said on Thursday, spooking markets with the prospect of default.

European stocks extended losses and safe haven bond futures gained after Jean-Claude Juncker said the IMF expected the European Union to step in if it were unable to release the June aid tranche, but that would be impossible.

Greece's finance minister said this week that if the next 12 billion euro payment was not forthcoming, the country would be unable to meet its obligations and would default.

"If the Europeans have to acknowledge that the disbursement from the IMF on June 29 cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF's portion of the financing," Juncker told a conference in Luxembourg.

"That won't work because in certain parliaments -- Germany, Finland and the Netherlands and others too -- there is no preparedness to do so," he said.

An IMF spokeswoman in Washington confirmed the global lender could not continue to lend to Greece until it had financing assurances from EU partner countries for the bailout programme.

"We never lend when we don't have an assurance there will be no (financing) gap. That is how we maintain the safety of our members' money," spokeswoman Caroline Atkinson told a briefing.

The IMF was also seeking assurances in the areas of fiscal and growth policies, she said.

German government bond futures rose on Juncker's remarks.

"That's massively negative for Greece," one trader said. "It takes (the crisis) to a new level."


The first public dispute between the IMF and the EU on euro zone bailouts burst into the open on Monday when Greek Finance Minister George Papaconstantinou said the Fund was threatening to withhold its share until the EU guaranteed that it would cover any shortfall in Greece's 2012 funding needs.

Under its May 2010 EU/IMF bailout programme, Athens was supposed to return to capital markets next year, raising 24 billion euros towards its funding needs.

But as the crisis has escalated and Greece has strayed from its deficit reduction targets due to a revenue shortfall, any prospect of tapping the markets next year has evaporated, raising pressure for the EU to agree a second bailout package.

Euro zone finance ministers have accepted the principle of further loans to Greece provided it steps up austerity measures, revenue collection and privatisations.

The EU is applying strong pressure on Greek leaders to unite behind the key targets, as Irish and Portuguese politicians have done, making bipartisan support a condition for further aid.

That has heaped pressure on Greek Prime Minister George Papandreou whose main opponents have refused to support the government's latest austerity measures.

Papandreou invited opposition leaders to fresh talks on Friday to try to build a cross-party consensus.

"It is a meeting in search for consensus, even if it is practically almost impossible. I don't think anyone expects that the parties' stance will change now," said Costas Panagopoulos, head of ALCO pollsters.


The International Monetary Fund's chief economist told Reuters a restructuring of Greece's 327 billion euro debt -- equivalent to 150 percent of its economic output -- was neither inevitable nor a "magic bullet" and there was still a genuine chance that Athens could avoid it.

"The notion that restructuring would be a magic bullet is clearly not right," the IMF's Olivier Blanchard said in an interview with Reuters Insider in Brazil.

"Restructuring would also come with the risk of contagion."

A key focus this week has been on speeding up a planned sell-off of Greek state assets.

The Netherlands is leading a drive for international supervision of the privatisation programme, with the proceeds used as collateral for loans.

Germany meanwhile appeared to back away from the idea of a voluntary extension of Greece's bond maturities, bowing to warnings from the European Central Bank and credit ratings agencies that any such move would be highly risky.

German Finance Minister Wolfgang Schaeuble discussed options for such a so-called "soft restructuring" with senior euro zone policymakers at secret talks in Luxembourg earlier this month, participants said.

But Schaeuble told Thursday's business daily Handelsblatt that tinkering with maturities would be a leap in the dark.

"A debt restructuring scenario bears high risks. It could result in an immediate maturing of all loans, with the corresponding consequences for Greek solvency," he said.

Juncker who convened the Luxembourg meeting, has also said ministers are working on a "soft restructuring" of Greek debt, while other policymakers talked of a possible "reprofiling".

But the ECB voiced vehement opposition to any attempt to persuade private bondholders to accept longer maturities, threatening to reject Greek bonds as collateral in refinancing operations in that case.

All three ratings agencies said adjusting debt maturities would be considered a default-like "credit event", triggering a chain reaction of consequences for Greece's credit rating, Greek commercial banks and companies, and potentially other euro zone sovereigns.

European members of the Group of Eight major industrialised countries sought to keep the euro zone crisis off the agenda of a G8 summit in Deauville, France, officials said.

Asked if European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso would discuss the deepening Greek crisis with the United States and other partners, EU officials said Deauville was not the right place.

A senior Western diplomat said that in U.S. eyes, a Greek debt restructuring appeared "100 percent unavoidable".

"Greece has two options, raise revenue or restructure. The former is unfeasible," the diplomat said. (additional reporting by John O'Donnell and Jan Strupczewski in Brussels, Lesley Wroughton in Washington, Stuart Grudgings in Rio de Janeiro and Christiaan Hetzner in Berlin; writing by Paul Taylor; editing by Mike Peacock)

Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

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