June 17, 2011 / 12:27 IST
Growing fears of economic spillover from the Greek debt crisis could force IMF member countries to backstop Athens with funds to give Europe time to nail down a deal to keep the eurozone country afloat.
Greek Prime Minister George Papandreou is trying to push through an EU/IMF-backed austerity package despite popular discontent.
Athens needs its fellow eurozone members to come up with more money to cover its financing, but there is little political appeal among some European countries to dole out more money unless Greece can show a commitment to deep budget cuts.
German Chancellor Angela Merkel and French President Nicolas Sarkozy meet on Friday to try to find a way to ensure Greece can avoid a default on its sovereign debt, which totals 340 billion euros (USD 480 billion). French and German banks have the most exposure to Greek debt.
Behind the scenes, the United States has been urging Europe not to let the situation get out of hand. Global markets are already spooked, with investors shying away from risky assets and piling into US Treasuries and the dollar.
Washington would likely back interim funding from the IMF if the Greek situation worsens. Normally, the IMF would only lend unless it had firm financing assurances for Greece for the next 12 months, and a departure from that practice would be unprecedented.
"No one wants to see the situation spiral out of control," said one source close to the talks referring to contagion risks.
BALL IN WHOSE COURT?
Officials at the International Monetary Fund have been looking to Europe to first approve additional funds for Greece before they ask the IMF board of member countries to clear the way for release of a further 12.5 billion euros (USD 18 billion) in EU/IMF funds for Athens. The fund's portion is about 3 billion euros (USD 4 billion).
IMF officials close to European Union talks said the fund was growing concerned but was waiting for Papandreou to name his Cabinet, which is unlikely to include the much respected Greek finance minister, George Papaconstantinou.
The IMF on Thursday kept up pressure on Greece to approve the austerity plan, saying its support for the nation was "subject to adoption of the economic policy reforms agreed with the Greek authorities" earlier this month.
It expressed confidence the next Eurogroup meeting of finance ministers would have a "positive outcome."
Without a euro-area deal, the IMF may have to weigh whether the situation in Greece warrants unprecedented measures in the absence of a longer-term plan that ensures Athens can service its debts.
"There is a lot at stake here, including whether or not Greece will be able to repay the IMF and what guarantees Europe comes up with," said one IMF board official, acknowledging divisions among countries on the 24-member body over Greece.
While US banks do not have significant exposure to Greek debt, the effects of the crisis are being felt in global financial markets and there have been signs of growing strains in interbank lending.
In addition, investors have shed riskier positions for safe-haven assets, and the euro fell to a record low against the dollar.
The threat of a troubling contagion from the Greek crisis may be enough to dampen emerging markets' anger toward Europe over its unrelenting claim to the IMF's top job.
Europe has nominated French Finance Minister Christine Lagarde for the post, which was left open by the resignation last month of Dominique Strauss-Kahn after he was charged with the attempted rape of a hotel maid in New York. Mexico's central bank chief, Agustin Carstens, has argued he would be an objective player in dealing with the European debt crisis.
"I think someone coming from the outside would speak their mind more frankly" on the European debt crisis," Carstens told the Peterson Institute, a Washington policy think tank, this week.
But some emerging nations might warm to Europe's argument that someone with a feel for the political nuances in the unfolding European debt drama is best for the job.
A decision on the next head of the global lender is due by June 30.
