IMF said to oppose push for Greek collateral

The International Monetary Fund opposes European plans to force Greece to put up collateral in its second rescue, said four people with direct knowledge of the matter.

The use of collateral, a concession to win Finland's backing for 109 billion euros ($155 billion) of loans pledged by euro leaders in July, would deny the IMF priority creditor status and violate Greek bondholders' rights, said the people, who declined to be named because the talks are in progress.

IMF objections threaten to snag Europe's crisis-management effort after aid of 256 billion euros for Greece, Ireland and Portugal failed to restore order. Europe also faces hurdles in trying to widen the powers of its rescue fund, with German lawmakers demanding a veto over its operations.

The 17-country euro area's troubles "are going to get worse, not better," Nouriel Roubini, a professor at New York University's Stern School of Business, told reporters in Cernobbio, Italy today. "We're in this vicious circle which is likely to have systemic effects in the euro region."

Greece's predicament deepened today with the forecast of a worsening economic contraction and a two-week suspension of a European-IMF economic review mission to give the government time to plot a pro-growth course. Two-year Greek yields rose today above 47 per cent, a euro-era record.

IMF spokesman David Hawley had "no specific comment" on the European collateral discussion at an Aug. 25 press conference in Washington. Another spokeswoman, Conny Lotze, declined to go further when contacted by e-mail today.

SUMMIT AGREEMENT
Collateral was one element of the second Greek package set up on July 21. Also at that summit, euro leaders agreed to give the main rescue fund, the 440 billion-euro European Financial Stability Facility, the power to offer precautionary credit lines, recapitalise banks and buy bonds in the secondary market.

Initial market gains dissipated, leading the European Central Bank to start buying Italian and Spanish bonds on Aug. 8. Bond yields also climbed in France, bringing the threat closer to Europe's core and forcing President Nicolas Sarkozy into a pre-election austerity package.

Europe's relations with the IMF, contributor of a third of the bailout money so far, have worsened as the crisis drags on. Trans-Atlantic miscommunication complicated Greece's payout in July, and officials from emerging economies such as Brazil have questioned the fund's exposure to Europe.

Negotiations on the issue continue September 5 with visits by European Union President Herman Van Rompuy to Helsinki and Berlin, and Sept. 6 with a meeting of the Finnish, Dutch and German finance ministers in Berlin.

Throughout August, AAA rated Finland was at center stage with its pursuit of collateral, the product of a June coalition accord by new Prime Minister Jyrki Katainen after an election marked by an anti-bailout backlash.