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May 3, 2010 11:14 pm
European governments that once wanted to keep the International Monetary Fund well away from Greece’s debt woes have ended up endorsing a rescue plan that bears the IMF’s unmistakeable imprint, economists said on Monday.
The three-year, €110bn eurozone-IMF programme, announced on Sunday, jettisons budget deficit and economic growth targets that Greece negotiated with other euro area governments and the European Commission this year.
In their place, the plan inserts targets that economists said were more realistic, reflecting the IMF’s input, and more likely to persuade financial markets that the rescue package has some chance, however slim, of succeeding.
At the start of this year, the IMF was providing technical assistance to the Greek authorities, but many of the eurozone’s 16 governments, including France and Spain, holder of the European Union’s rotating six-month presidency, opposed IMF financial involvement.
They contended that it would send a terrible signal to the world about the eurozone’s inability to solve its internal problems a mere 11 years after the euro’s launch.
Christine Lagarde, France’s finance minister, said the IMF should no more help Greece than it should California, because both were part of a single-currency area.
Behind the scenes, however, countries such as Finland, the Netherlands and Italy were more open to calling in the IMF, aware of the fund’s unrivalled reputation for effective crisis resolution. Outside the eurozone, Poland, Sweden and the UK were making the same argument.
“It is easier for the IMF to play the role of bad cop – and the European Central Bank and European Commission have shown themselves too subservient to national governments,” said Ciaran O’Hagan of Société Générale, the French bank. “The IMF has learnt in the past few years to make good use of threatening to not pay up if the borrower doesn’t play ball with its recommendations.”
The results are visible in the latest austerity programme that Greece has been obliged to adopt in return for loans aimed at averting a debt restructuring.
Whereas the economic programme that Greece agreed with its European partners foresaw a mild contraction this year of 0.3 per cent of gross domestic product, followed by three years of steady growth in 2011, 2012 and 2013, the IMF-influenced plan sweeps aside such forecasts as far too rosy.
It envisages a 4 per cent slump in GDP this year, a 2.6 per cent drop in 2011 and a return to modest growth of 1.1 per cent in 2012.
Similarly, the old plan was founded on the assumption that Greece could slash its budget deficit to less than 3 per cent of GDP by the end of 2012, from an estimated 12.7 per cent in 2009.
Reflecting its harsher growth forecasts, the IMF-eurozone plan abandons the 2012 target date for budget consolidation and sets 2014 as the year for Greece to bring its deficit below 3 per cent.
“This is in my view a very positive change, which enhances the credibility of the programme by making it more realistic and reducing the risk that deviations from target could quickly occur because of lower-than-programmed growth,” said Marco Annunziata, economist at Italy’s UniCredit bank.
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