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May 12, 2011 / J. Shaw

Debt Crisis Could Spread in EUROPE

 Athens Riots

Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis may yet spread to core euro zone countries and emerging eastern Europe, the International Monetary Fund said on Thursday.

The warning came as government sources in Athens said international inspectors checking on Greece’s compliance with its EU/IMF rescue package had found problems and were pressing for deeper spending cuts to cover a likely revenue shortfall.

A Reuters poll of investors and economists showed an overwhelmingly majority believe Greece will restructure its debt, possibly as soon as late this year. Most fund managers expect Athens to pay back less than half of what it owes.

The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered Europe’s sovereign debt crisis in 2009 still had plenty of untapped potential to raise extra cash itself though privatizations.

“Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.

Finance ministers of the 17-nation single currency area are set to approve a 78 billion euro rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package.

But markets are increasingly concerned that Greece will never be able to repay its 327 billion euro ($464 billion) debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.

Asked whether there could be a new aid package to help Greece work through its fiscal recovery program, the IMF’s European department director, Antonio Borges, said the fund was open to the possibility.

“The Greeks have to take the initiative, and so far they have not approached us. The IMF stands ready (to provide additional support) as a matter of policy,” he told reporters.

The semi-annual IMF report said peripheral members of the euro zone needed to make “unrelenting” reform efforts to overcome the debt crisis and prevent it spreading further.

It also urged the European Central Bank to tread carefully on further rises in interest rates after last month’s first increase since 2007, saying euro zone monetary policy could “afford to remain relatively accommodative.”

GREEK YIELDS SOAR

Borges said the program of austerity measures and structural reforms agreed a year ago was “probably the best thing that can happen” to Greece, though there was always the question of whether it was too ambitious.

The Socialist government has implemented harsh cuts in public spending, public sector wages and pensions but struggled to raise revenue due to deep recession and chronic tax evasion. A general strike on Wednesday highlighted growing resistance to austerity.

MORE…http://news.yahoo.com/s/nm/20110512/ts_nm/us_eurozone

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