WASHINGTON/ATHENS (Reuters) - IMF chief Christine Lagarde is warning Europe that Greece’s economic prospects are deteriorating and the European Union will either have to pony up more money to rescue Athens or debt holders will have to stomach steeper losses.
Unless the private sector or the EU contribute more to Greece’s rescue, the International Monetary Fund will view the nation’s debt load as unsustainable and may be unwilling to deliver more funds, IMF sources told Reuters as Lagarde met with Germany’s and France’s leaders in Europe.
Although the prospect of EU paymaster Germany coming up with more money seems remote, analysts believe European politicians and international lenders will eventually find a way to avoid a messy Greek default that would destabilize the continent and potentially undermine the global recovery.
But crafting a solution is growing increasingly difficult because IMF members, and in particular the United States and emerging countries, are reluctant to throw more money at Greece unless it is firmly back-stopped by fellow euro-zone members.
The sense of urgency has grown in recent weeks.
Sources said the IMF now believes the economic slowdown under way in Greece and the euro zone as a whole is proving deeper than it expected when the latest bailout was approved in principle in October. The projected cost then was already a hefty 130 billion euros.
IMF officials acknowledge privately that Greece is already stretched to the limit by austerity programs, making further belt-tightening untenable and pressuring official lenders or bondholders to bear a greater burden.
IMF and EU negotiators head to Athens next week for talks meant to nail down details of the new bailout program before Greece needs to redeem 14.5 billion euros in government bonds on March 20.
Greek Prime Minister Lucas Papademos has said if a deal is not reached, a disorderly default could follow and that the country might have to abandon the euro.
German Chancellor Angela Merkel and French President Nicolas Sarkozy told Greece on Monday it needed to move forward. Lagarde met separately with Merkel and Sarkozy on Monday and Tuesday.
But talks aimed at getting private-sector creditors to shoulder a bigger part of a new Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro-zone governments will have to increase their contribution.
Another senior IMF board member told Reuters time is running out.
“The longer everyone delays tough decision, the more difficult it is becoming to pull Greece from the brink. We need to know that its debt is sustainable,” the board member said.
IMF chief economist Olivier Blanchard warned last week that Greece can not survive without a reduction in its debt burden and a bank recapitalization.
An October EU summit agreed that Greek debt should be reduced to 120 percent of gross domestic product by 2020. Current talks between Greece and its private bondholders are vital to meet that target.
While the IMF is an observer of those discussions, officials have made clear that if the deal with private bondholders does not help reduce Greece’s debt-to-GDP-ratio, Europeans would have to make up the financing gap.
If bondholders refuse to take larger losses and the EU does not agree to provide more aid, it is unlikely the IMF would come in to save the day, a senior diplomatic source said.
“If both the banks and the EU partners will not do it, then there is a problem,” the diplomat said.
Ben May, an analyst at London-based Capital Economics, said the risk of a disorderly default when the 14.5 billion euros in bonds come due was “small but not insignificant.”
“It is a risk,” May said. “Concerns will arise when we get nearer to the March bond redemption if something does not seem to be falling into place.
“There is a whole stack of things that could go wrong, perhaps because Greece won’t agree to things that are demanded of it,” he added.
Papademos leads an uneasy coalition government, and parties are reluctant to embark on unpopular reforms ahead of snap elections pencilled for March or April.
Diego Iscaro, senior economist at IHS Global Insight, said it was important for Greece to show that it was trying to help itself, even in a politically difficult environment.
“You need growth, not only for the debt ratio but also for the political willingness to continue to stay in the euro zone,” he said. “The fact that the economic situation is getting worse in the euro zone as well makes it more difficult.”
Whitney Debevoise, a former U.S. executive director of the World Bank board, said it was important to IMF member countries that Greece’s program be fully financed, which means additional European money may have to be committed.
“A time-honored IMF thing is that you don’t want to do a program which is not fully financed, and this one has question marks around several aspects,” said Debevoise.
The IMF needs to confront a range of issues before it frees up further lending. It has to gauge whether policy promises in Athens are leading to needed structural change and whether a deal with private bondholders will ease the nation’s debt burden sufficiently, Debevoise said.
But is the IMF willing to walk away?
“Probably at the end of the day the Fund will come in but only after they have seen a lot more resources on the table from Europe, and also probably with a robust discussion about how much IMF money is there available for Greece,” Debevoise added.
Already, concern is rising among IMF member countries about the Fund’s growing exposure to Greece, with lending already at 2,400 percent of the nation’s IMF quota — by far the largest on record since 2003.
U.S. Republican lawmakers are already taking aim at Washington’s support for the IMF, threatening to snatch back a loan approved for an IMF crisis fund in 2009. With a presidential election looming in November, the Obama administration has made clear it has no plans to provide further resources through the IMF to help Europe.
Reporting By Lesley Wroughton; Editing by Jan Paschal