IMF Chief Lagarde cautions against Greek exit fallout

Following Greek President Carolos Papoulias's decision to nominate a judge as the head of the interim government, the chief of International Monetary Fund (IMF) until the upcoming election, Christine Lagarde, called on prominent Greek leaders to show their commitment to stay with the euro zone on Wednesday. She stressed on the importance of sticking to the bailout agreement – not just for Greece’s own financial and political security but also for the entire euro zone. She also pointed out the possible consequences of such exit – which would be “hard and expensive, and not just for Greece”. Greece is set for a repeat general election on June 17.

What is adding to the fear and speculation in Europe is the rising popularity of political parties in Greece who are against European Union-IMF bailout deal. In the event that an anti-bailout party comes to power following the election, there is a chance that the bail-out deal might come apart and Greece would exit from euro zone.  There is also a fear of its cascading effect on other bigger but vulnerable economies in Europe, especially Spain and Italy.

Top EU officials have already warned Greece that complying with the terms of the bailout package is mandatory in order to receive international monetary aid.

Proposed Greek bond swap finally gets creditors approval

Finally, the Greek debt restructuring program cleared its last hurdle on Friday after private bond holders agreed to exchange their existing old bonds for new securities. This clears the way for Greece to receive €130 billion in bail-out package from the International Monetary Fund (IMF) and European Union (EU).

The proposed new deal has found favor with 85% of the private holders of Greek bonds whose net worth is € 172 billion in bond amount. The rest 15 percent (equivalent to €25 billion) would be swept up through collective-action clauses. Together, these would add up to € 197 billion out of the total € 206 billion. The latest bond-swap deal expects its private bond holders to accept financial loss that could go as high as 75 percent.

The Greek debt restructuring program is supposed to bring some measure of relief for the participating investors. It is reported that about 15 percent of their holdings would be in good, short-term bonds and 31.5% in upcoming Greek bonds with 11 to 30 years of maturity period. In addition, they would also receive Greece GDP-growth linked security. This doesn’t look much encouraging considering Greece’s current financial woes.

For Greece, besides bringing down the public debt amount, the new bond swap would also reduce its yearly interest burden, starting this year. Last year, the interest itself was as high as €16.4 billion.

Is global recession imminent?

In the midst of market uncertainty coupled with sluggish economic growth, few had expected robust beginning to this New Year. But few had actually anticipated or openly admitted that attempts to bring global economy back on track could be numbered. That Eurozone has approached ‘a perilous new phase,’ acknowledged by none other than the International Monetary Fund (IMF) on Tuesday has certainly given it credibility. But hasn’t the threat of global recession been on the cards for some time now?

The bleak prediction by International Monetary Fund is based on two prevailing situations – high financing cost borne by euro zone nations and European banks facing severe credit crunch. Experts are of the opinion that each of the two conditions could have triggering effect on the other and may lead to further economic contractions.

Factors outside Eurozone could also have a large impact on global economy. Important among them are hike in global oil price due to sanctions on Iran, investor fear in the prevailing market scenario or possibility of spill-over effect of European debt crisis on other big economies like the United States as well as emerging economies like Japan.

On its quarterly updates, IMF has scaled down its previous global growth estimates of the year 2012 from 4 percent to 3.25 percent. In her latest speech, Managing Director of IMF, Christine Lagarde, has called on all the nations of the world to help bolster the bail-out fund and combat the threat of global recession. Currently, the fund is seeking $500 billion in addition to its present reserve.