Budget cuts vital, not only in Greece, says IMF economist

Several countries could come under the kind of financial market pressure suffered by Greece unless they produce credible deficit-containment plans, but there is little sign of contagion so far, the IMF's chief economist said.

Fiscal consolidation targets announced by Athens would fix Greece's fraught public finances if enacted, Olivier Blanchard told Reuters.

"I think the plan that the government has announced - a decrease (in the deficit) to 3 percent (of GDP) - clearly would solve the problem. Then the question is implementation," he said in an interview in Paris yesterday.

After revealing a 2009 deficit of 12.7 per cent of GDP, twice what was previously predicted, the Greek government announced plans in mid-January to cut that gap to 2.8 per cent by 2012.

But that has not stopped its borrowing costs hitting euro lifetime highs because of scepticism in financial markets, compounding the troubles it faces in refinancing one of Europe's largest sovereign debts.

Asked if the euro currency zone could survive a debt default by Greece, Blanchard said that the issue was "hypothetical" and suggested Athens and its partners in the euro zone and wider EU group should cooperate closely on what happens next.

"Greece is a eurozone country and it is normal that they are working together, and it is up to the EU and Greece how they work this out and what decision is taken," Blanchard said.

Greece joined Europe's currency union in 2001 and for several years enjoyed favourable financing costs in a debt market which did not discriminate heavily between countries with good and bad fiscal records.

Blanchard acknowledged that Greece's market woes had erupted suddenly but said there was little sign of a ripple effect.

"It's a general property of markets that they tend to sleep too long and wake up too fast," he said. (But) I think there's been little contagion so far.

Blanchard, who confirmed that Greece had requested technical advice but not financial help from the IMF, said governments in many developed countries risked similar market pressure if they failed to produce convincing plans to prevent runaway debts.

"Greece probably had the worst situation so it's to be expected it's one of the first to face the problem," he said.

"But if you look forward, it will be critical, as we have said, that governments have really credible deficit reduction plans."

Greece's government estimates its sovereign debt will hit 120 per cent of GDP this year and, under the plan unveiled in January, will edge down to 113 per cent of GDP in 2013.

Blanchard acknowledged that budget cutbacks were hard for governments to accept but said market pressure might ensure they occur.

"Governments have plenty of reasons to ignore them as long as they can. If they are forced either by treaty or by financial markets, there's a better chance it happens," Blanchard said.

The European Union will tell Greece next week to take additional measures by May 15 to shore up its finances, Greek newspaper Ta Nea said today.

The European Commission's recommendations, which are due to be made public on Feb. 3, include cutting nominal wages in the public sector and setting a ceiling for pensions, it said.