TWO WEEKS ago, euro zone governments, the European Central Bank and the European Commission were singing from the same song sheet as they rejected suggestions that the International Monetary Fund (IMF) should provide financial aid for Greece to help it overcome its debt crisis.
Yesterday, the European tune sounded more discordant after Germany – supported by Finland, the Netherlands, Italy and potentially others in the 16-nation euro area – said Greece, if it required money, could turn to the IMF after all.
The German intervention shifted the ground on which the debate on a rescue plan for Greece had taken place since the awful truth about the nation’s difficulties – a budget deficit of almost 13 per cent of gross domestic product and a public debt soaring above 120 per cent of GDP – emerged last October.
But with European Union leaders due to convene in Brussels next Thursday for an economic policy summit, the German step by no means closes the debate, analysts say.
“The most likely option remains funding from the EU or euro zone countries, with the IMF role remaining one of technical assistance, or at most a front for decisions effectively taken in Brussels,” said Harvinder Sian, economist at RBS Markets.
He and others point out that IMF financial involvement is opposed by Jean-Claude Trichet, the European Central Bank president, who used his monthly news conference on March 4th to speak out against an appeal to the Washington-based institution.
“We don’t believe Trichet would have been so aggressive with the anti-IMF view if the IMF funding solution had been very likely,” Mr Sian said.
Other vocal opponents of an IMF rescue operation include Nicolas Sarkozy, France’s president, and Spain’s Socialist government, which holds the EU’s rotating presidency.
Each takes the view that to call on the IMF would be to admit serious flaws in the design of Europe’s monetary union, to sow doubts in the minds of non-European investors about the project’s indestructibility, and to lower Europe’s global prestige.
Such considerations are also at play in Germany’s internal discussions, but Angela Merkel, the Christian Democrat chancellor, is obliged to weigh them against cold political realities.
Politicians in her own party, her Free Democrat coalition allies, a phalanx of German central bankers and the vast majority of the general public are opposed to the use of German money to assist Greece.
Ms Merkel’s thinking is also framed by the prospect that a German-led euro zone aid operation might be declared illegal on the grounds that it violated EU law banning individual governments and the community as a whole from assuming a country’s debts.
Diplomats said it remained possible that the EU would cobble together a compromise under which it and the IMF joined forces to help Greece, as they did in emergency aid plans devised for Hungary and Latvia in 2008.
Likewise, German law-makers briefed by the government signalled that IMF intervention need not preclude euro zone help.
One senior Christian Democrat said Greece could call on the IMF for its expertise in devising and monitoring assistance programmes, while turning to the IMF’s euro zone members for the necessary funding.
Under such an arrangement, the US, the IMF’s largest shareholder, would not be involved in any decisions that could impinge on euro zone monetary policy and the European Central Bank’s independence, the Christian Democrat said.
For Greece, meanwhile, the appeal of IMF financial assistance becomes more alluring the longer the euro zone dithers about what to do.
Interest rates on IMF loans are typically based on the rate for special drawing rights, a form of artificial currency.
This rate currently stands at a mere 1.26 per cent – such that, even if asked to pay a surcharge, Greece would be better off than with the market rates of 6 per cent or higher that it is paying now. – (Copyright The Financial Times Limited 2010)
