IMF Calls for ‘Greater Sense of Urgency’ on Greek Funding

The International Monetary Fund today called for a “greater sense of urgency” in resolving the Greek debt turmoil and avoiding a contagion to the core of Europe.

“The fiscal situation in Greece threatens market disorder that would affect funding rates for other vulnerable sovereigns and could have severe implications for financial institutions,” the IMF staff said in a note prepared for a meeting of Group of 20 deputy officials in Paris last week. “Delays to implement measures to ensure that Greece is securely funded would likely cause market disruption.”

With Greece unable to return to the markets next year as initially planned under a joint 110-billion euros ($156 billion) bailout with the European Union, the IMF has urged officials in the region to quickly agree on new sources of funding as the crisis spreads to Spain and Italy.

In today’s note, the IMF warned that concerns about the European turmoil have increased risks to global economic growth. Other threats to stability include a lack of credible plans to reduce deficits in Japan and in the U.S., where “a deadline for raising the debt ceiling looms large,” it wrote. Overheating pressures in developing nations are also intensifying, it said.

The G-20 note was written before a meeting of European finance ministers this week, who floated ideas from bond buybacks to a temporary default in an effort to change strategy on stemming the crisis as borrowing costs from Spain to Italy surged.

Europe’s Concern

Ministers are concerned that the IMF will curb its share of a new Greek rescue of as much as 115 billion euros ($163 billion) unless the plan includes deep cuts in Greece’s debt burden, two people with knowledge of the talks said.

Christine Lagarde, the IMF’s new managing director, said this week that the fund is not yet discussing the details of its participation in a new loan program for Greece and told reporters that “nothing should be taken for granted.”

While the money banks in some “key economies” have at risk in Greece, Ireland and Portugal is large, the capitalization of banks in Europe remains relatively low compared with the U.S., the IMF said today.

“In the event of a disorderly sovereign default in the euro area, risk appetite would likely decrease sharply, causing unwinding of positions and elevated funding rates for banks and vulnerable sovereigns in similar positions within the euro area, with possible spillovers for banks and sovereigns in the rest of the world,” the IMF wrote.

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net