BL: Rogoff Says Greece Won't Be Last IMF Rescue as Ireland, Spain `Vulnerable'
By Simon Kennedy
April 26 (Bloomberg) -- Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff.
“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate. Greece on April 23 triggered a 45 billion-euro ($60 billion) rescue package from the IMF and the euro region after its soaring deficit sent borrowing costs surging and sparked concern about a default.
At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent.
The likelihood is “better than 50-50” that others in the 16-nation euro area will end up requiring help from the Washington-based lender, said Rogoff, 56. He expects the IMF will eventually dispatch more loans to Greece than the as-much- as 15 billion euro it’s currently offering.
High Stakes
“The stakes are very high for Europe as it wants to avoid contagion,” said Rogoff, who in 2008 predicted the failure of some large U.S. banks prior to the collapse of Lehman Brothers Holdings Inc.
Any Spanish bailout would dwarf that for Greece as its economy is four times bigger. Although Spanish debt as a share of GDP is 53.2 percent compared with Greece’s 115.1 percent, it’s still worth 560 billion euros, more than double Greece’s burden. Ireland has debt of 105 billion euros, or 64 percent of GDP, and Portugal has 126 billion euros, equivalent to 76.8 percent of GDP.
Investors are expressing their concern by charging countries with large deficits increasingly more to borrow for 10 years than they do Germany, the euro-area’s largest economy and issuer of its benchmark debt.
The gap between German and Greek bonds widened 76 basis points to 635 basis points as of 10:41 a.m. in London today. That’s the highest since at least March 1998, when Bloomberg began compiling the generic prices.
Portugal was charged 213 basis points more to borrow than Germany, and Spain was 99 points. The spread for Ireland widened to 182 points, the most since the country’s 2010 budget was published on Dec. 9.
‘Political Will’
“I wouldn’t say they have to have an IMF program, but it’s possible,” said Rogoff of Spain, Portugal and Ireland. “It’s hard to say, as so much depends on political will and the numbers.”
He spoke before Greek officials led by Finance Minister George Papaconstantinou spent the weekend negotiating with IMF and European officials in Washington. Investors betting against Greece now will “lose their shirts,” Papaconstantinou said yesterday. IMF Managing Director Dominique Strauss-Kahn said the talks will be completed in time to meet the nation’s needs. Greece has 8.5 billion euros of bonds maturing on May 19.
Contagion Risk
Canadian Finance Minister Jim Flaherty, also in Washington for the spring meetings of the IMF and World Bank, said Group of 20 nations, including some in Europe, are worried the aid plan is “not enough” and want to ensure any rescue is a “one-time event.”
“The IMF has the capacity to lend more and we’ll eventually see the IMF give more,” Rogoff said.
IMF and European officials played down the risk that euro- area nations other than Greece will require outside aid. Strauss-Kahn said April 22 he doesn’t “see a need these days to focus on any other countries but Greece.”
European Central Bank Governing Council member Ewald Nowotny said in an April 24 interview that Spain and Portugal’s “numbers” are “not to be compared with those of Greece.” French counterpart Christian Noyer dismissed such speculation as “sport in the markets.”
‘Bogeyman’
Rogoff said the “basic game plan” of European policy makers is to hope their economic recoveries strengthen enough to enable governments to cut their debt. The IMF last week predicted the euro-area economy will expand 1 percent this year compared with 3.1 percent growth in the U.S.
“Recovery will mitigate the debt problems,” Rogoff said. “It’s very hard for Europe to get a sustained recovery.”
Governments call in the IMF when they need a “bogeyman” to act as a focus for voters’ anger when budget cuts are unavoidable, Rogoff said. Greek unions and opposition parties have already slammed Prime Minister George Papandreou’s appeal to the lender because it will likely result in tougher austerity measures.
Strauss-Kahn said April 24 that Greeks ‘shouldn’t fear the IMF” and that “we are there to try and help them.”
“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame,” Rogoff said.
To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net
Last Updated: April 26, 2010 05:50 EDT
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