Deep divisions reopen over eurozone

The eurozone crisis came back into the spotlight last night as speculation mounted at the IMF/World Bank meetings that the Troika of IMF, European Union and European Central Bank (ECB) would have to take some losses on their holdings of Greek debt as early as next year.

The hotly-disputed banking union plan was another issue on which policymakers were still deeply divided.

“We are in a situation where we do not know, especially with the recapitalization of the financial institutions that the eurozone is going to put on, whether we are solving future problems or past problems,” the governor of the Czech central bank, Miroslav Singer, told Emerging Markets.

“Who is going to fund the recapitalizations of some countries’ banks? What is going to happen with the Greek debt that is now on the official balance sheets of many eurozone entities? These small issues will have to be resolved.”

Charles Dallara, the former managing director of the Institute of International Finance (IIF), who led the debt restructuring negotiations with Greece on behalf of private creditors last year, said it was unlikely that the country would default on its obligations outright.

“The eurozone and the IMF will need to step up and provide additional lending and we may see some restructuring [of Greek debt] at that time,” Dallara said. The European members of the Troika will most likely reduce interest rates and stretch out the maturities on the debt, so some losses are possible, in his opinion. He estimated that the eurozone may have to provide between $15 billion and $20 billion to the country in new lending.

He added that the IMF should “take the lead” and reduce interest rates on Greece’s debt, which are “extraordinarily high” at around 3.5% to 4%. “When we restructured [Greek] debt on behalf of private sector lenders, the interest rate was cut to around 2%.”

A senior IMF official who requested not to be named told Emerging Markets that there was an agreement among the Fund’s stakeholders that a further reduction of Greece’s debt burden was needed, “probably next year” and that the European authorities had agreed to take the necessary measures. The official added that the IMF would not take part in the efforts to reduce Greece’s debt.

David Hale, a Chicago-based global economist and advisor to investors, said that “the IMF, historically, never takes losses. The IMF always gets repaid. What they want is for the EU to take the losses. When the IMF does [face a] loss, it has sanctions [that it can levy].” But he noted that there had been a “huge recovery of confidence in Greece.”

Christine Lagarde, IMF managing director, highlighted the positive aspects about Greece, saying that the country would actually produce a primary budget surplus this year, exceeding its earlier target.

But she also sparked the wrath of European officials such as ECB executive board member Joerg Asmussen by suggesting during a press conference on the first day of the meetings that Europe should provide more debt relief to Greece.

Paul Sheard, the S&P’s chief global economist, said the eurozone would take longer to address its challenges because of the complicated structure of the single currency area.

On the possibility of a Greek default on its official sector debt, he said: “I can only wish that they don’t but if they continue as they are right now, they are headed for more difficulty. The way it’s structured right now, they have not been able to address the issue of competitiveness; they have only been able to deliver a palliative.

“To address this issue they need to address the overall competitiveness of the economy but the question is how you can do that given the current political situation.”