Tension between IMF and Europe amid efforts to restart talks on Greek bailout

Thu, Jan 26, 2012, 00:00

DIVISIONS BETWEEN the International Monetary Fund and Europe over the debt crisis spilled out into the open as the IMF pressed the European Central Bank to accept losses on its holdings of Greek bonds.

The tension between the Washington-based fund and its European partners comes amid efforts to restart talks in Athens on a big private-creditor contribution to the second Greek bailout.

The IMF’s push for the ECB to join the effort to bring the Greek national debt back on to a sustainable footing reflects its concern that the current plan for Greece will not achieve the targeted debt level on time.

This calls into question the feasibility of an initiative that aims to cut Greece’s national debt to 120 per cent of gross domestic product by 2020 from 160 per cent.

The ECB, which opposed moves to seek a haircut on privately held Greek bonds, is resisting pressure from the IMF to take a loss, and senior euro zone officials say it is unlikely to yield.

In Paris yesterday, however, IMF chief Christine Lagarde publicly raised the question as to whether public bodies should also bear losses on their holdings of Greek bonds.

“The balance between the participation of the private and the public sector is a concerning question,” she told reporters. “If the level of Greek debt held by the private sector is not sufficiently renegotiated, then public sector holders of Greek debt should also participate in the efforts.”

Her remarks were received as an implicit reference to the ECB, which has acquired €40 billion in Greek bonds since its intervention in secondary debt markets in 2010.

This is at odds with key tenets of euro zone leaders’ policy on Greece, under which debt relief should be confined to the private sector.

Under this policy Greece must fully repay all loans drawn from the ad-hoc European fund backing its first EU-IMF bailout. The same principle will apply to a further package of loans from the European Financial Stability Facility under the country’s second bailout.

At the insistence of Germany of and other donor countries, such policies flow from political concern to minimise the risk to taxpayers’ money and to ensure the private sector bears costs in the rescue effort.

An ECB spokesman declined to comment on Ms Lagarde’s remarks, but referred to statements made by the bank’s chief Mario Draghi and his deputy, Vítor Constâncio, at a press conference three weeks ago.

Mr Constâncio said the ECB stance had not changed since Mr Draghi’s predecessor, Jean-Claude Trichet, ruled out any haircut on its Greek debt holdings. “PSI, by definition, is private sector involvement, so we are not involved in those negotiations,” he said.

The schism is not the first between the IMF and the EU authorities. When Ireland’s bailout was under negotiation in late 2010 the IMF agreed losses should be imposed on senior bank bondholders to reduce the cost of propping up the sector. The ECB succeeded in blocking any such departure, and continues to do so.

Talks between Greece and its private creditors are set to resume today, two days after euro zone finance ministers rejected a debt-swap offer from the Institute of International Finance (IIF) banking lobby.

“It is clear that what happens in the coming days will affect the country’s course for years,” said Greek government spokesman Pantelis Kapsis. “We are now in the most delicate phase of the negotiations to complete the debt swap.”

The IIF said a meeting of Greek creditors in Paris yesterday resolved to send IIF chief Charles Dallara and co-negotiator Jean Lemierre, adviser to the BNP Paribas chairman, back to Athens.

“The goal is to agree on all outstanding legal and technical issues as soon as possible,” it said.

The talks will turn to the rate of interest to be applied on new Greek bonds, which will be issued in exchange for old debt.

Concerned Greece’s debt would remain too high under a “final” IIF offer, euro zone finance ministers insisted the rate should be less than 3.5 per cent until 2020. The IIF plan would start at a rate of 3.5 per cent, rising in stages every two years to 5 per cent by 2020.

EU officials say there is no certainty the latest round of talks will be wrapped up before an EU summit on Monday. European Council chief Herman van Rompuy is likely resist discussion on the Greek bailout at the summit if a private sector involvement deal is not already in place.