Greece sharpens austerity; IMF warns on banks

Updated: 2011-09-22 10:19


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ATHENS/WASHINGTON - Greece adopted yet more austerity measures on Wednesday to secure a bailout installment crucial to avoid running out of money next month, as the IMF warned that Europe's sovereign debt crisis risks tearing a giant hole in banks' capital.

The Greek cabinet agreed to cut high pensions by 20 percent, put 30,000 civil servants in a "labor reserve" on a road to redundancy, lower the income threshold for paying tax and extend a real estate tax, a government spokesman said.

"The measures taken today allow us to comply with the bailout plan through 2014," the spokesman, Ilias Mossialos, said.

The new package is designed to ensure Greece gets an 8 billion euro rescue loan vital to pay state salaries and bills in October. Senior European Union and International Monetary Fund officials are to arrive in Athens early next week to review progress, Mossialos said.

Greece is on the front line of the euro zone debt crisis that has engulfed Ireland and Portugal and now threatens Italy, Spain and some of Europe's biggest banks, risking plunging the West back into recession.

Bank exposure

The International Monetary Fund on Wednesday said the crisis had increased European banks' exposure by 300 billion euros, and they need to recapitalize to ensure they can weather potential losses.

"Risks are elevated and time is running out to tackle vulnerabilities that threaten the global financial system and the ongoing economic recovery," the IMF said in its Global Financial Stability Report.

Officials said European governments are now looking seriously at ways to shore up banks' capital after initially rejecting an IMF call last month for urgent action, and signs of progress began emerging late on Wednesday.

Qatar is in talks with BNP Paribas on investing in France's biggest listed bank, and the Gulf state has held similar talks with other French banks, a source close to the deal in Qatar told Reuters.

Several banking sources also said they had heard private rumblings that France was discussing an injection of preference shares, a departure from its earlier position that its banks were well capitalised.

In Washington, South Africa's Finance Minister Pravin Gordhan said an IMF official told a meeting of developing nations that a solution to the euro crisis was "coming in the next few days."

Fears of another credit crunch or recession due to Europe's inability to overcome the debt crisis are expected to dominate the IMF/World Bank and Group of 20 meetings of finance chiefs that formally begin on Thursday in Washington.

A senior US Treasury official, briefing reporters before those talks, said European sovereign and banking stress posed the most serious threat to the global economy.

"The challenge they have before them is pretty clear. It is to be able to unequivocally ensure that sovereigns with sound fiscal plans have access to affordable financing. It is to unequivocally assure that European banks have the requisite liquidity and are sufficiently capitalized," the official said.


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