–Leaders Divided Over IMF Role In Any Aid Package

BRUSSELS (MNI) – The question of how to best assist
heavily-indebted Greece looms large as European heads of state and
government gather in Brussels for a two-day series of meetings starting
Thursday, with the markets anxious for additional information on a
possible aid package.

EU policymakers are split at least three ways on the issue, with
one faction preferring a Eurozone-led solution, a second wanting the IMF
to take the lead and a third advocating a compromise deal, combining IMF
money with bilateral Eurozone loans.

Speculation Thursday over a possible announcement, or
non-announcement, was putting downward pressure on the euro. Greek
government bond spreads tightened 6 basis points Thursday morning as
traders bet an aid announcement would be forthcoming.

What’s likely to emerge, analysts and EU diplomats say, is some
indication of the form that aid would take, if needed, and a reiteration
that Greece hasn’t yet asked for help. Numbers are unlikely to be
disclosed at this stage, they said.

Greece is struggling to manage a E300 billion debt mountain and a
budget deficit that stands at 12.7% of its GDP. EU rules require budget
deficits be kept below 3% of GDP.

Fears the southern European country won’t be able to service its
debt have pressured the euro in recent months. After ratings agency
Fitch downgraded Portugal’s government debt earlier this week, worries
intensified that the market turmoil surrounding Greece could spread to
other countries and ultimately destabilize the Eurozone.

Eurozone leaders have made it clear that they will give support to
Greece if it’s needed, in order to avoid destabilization of the monetary
union as a whole, but they are squabbling over the form such aid might
take and the role the International Monetary Fund would play.

German Chancellor Angela Merkel, with the support of Finland’s
delegation, sees a strong role for the International Monetary Fund. But
France, Spain, Luxembourg, the European Commission and the European
Central Bank have all said they would prefer a European solution. Some
ECB officials have warned recently that an IMF-led solution could
tarnish the credibility of the Eurozone.

Merkel Thursday said she will recommend at the EU summit that a
combination of International Monetary Fund help and bilateral Eurozone
aid be readied for Greece in case it should become necessary.

“In an emergency, such aid would have to be provided as a
combination of the International Monetary Fund and joint bilateral
measures in the Eurozone,” Merkel said, adding that this would be a
“last resort.”

Countries that have hitherto opposed IMF involvement appear to be
coming round. Jean-Claude Juncker, the Luxembourg Prime Minister and
head of the Eurozone finance ministers’ group (the Eurogroup), said
recently he could foresee a combined IMF-Eurozone solution.

But the European Central Bank has serious concerns that IMF
involvement will undermine the credibility of the euro.

“If the IMF steps in, the image of the euro would be that of a
currency that is able to survive only with the external support of an
international organisation,” Lorenzo Bini Smaghi, an executive board
member of the ECB, said Wednesday.

Some delegations, including France, are pushing for a separate
meeting of Eurozone heads of state later Thursday to try and thrash out
a deal, with the IMF’s role in a joint aid package one of the key points
of departure.

With the starting points so far apart, analysts said it was
difficult to see what form a compromise would take. One option would be
IMF-led aid combined with optional bilateral loans from Eurozone
countries.

“I now expect a formal announcement by the EU…that if a Eurozone
member needs financial help then the IMF will be asked to take the lead,
both in terms of financing and with respect to policy conditionality,”
Goldman Sachs chief economist Erik Nielsen said.

“Other EU countries might provide some co-financing like they have
done to EU countries outside the Eurozone, but this would be secondary,”
he said.

Nielsen said Greece would likely formally approach the IMF during
the next few months and that an aid package would probably be about E20
billion spread over 18 months.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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