IMF enrages Germany in Greek debt crisis
European markets plunged Thursday and the yield on Greek bonds soared amid fears it cannot pay off its debt as the International Monetary Fund began a two week visit. IMF advisers advising Greece on how to enact budget cuts have angered the German central bank by calling for a higher inflation target.
An internal note at the German Central Bank revealed that it is wary of aid to Greece as envisaged by the European Union and the IMF.
The Bundesbank has reportedly dubbed the IMF the 'Inflation Maximising Fund' because its chief economist is calling for a higher inflation target than Germany would accept.
"This agreement of the heads of government, which according to our knowledge has been reached without any consultations from central banks, implies risks to stability that should not be underestimated," said the memo, as quoted in German newspaper Frankfurter Rundschau.
This is not the first time Germany has taken a hard line with Greece over its finances; earlier this year the German Chancellor Angela Merkel suggested Greece sell off some of its islands.
Greece has nearly 300 billion euros of debt, and has set itself the task of cutting its budget deficit by four percentage points this year. But the austerity measures necessary to achieve this have prompted strikes and riots across the country.
The European Union could force the German Central Bank to hand over money directly to the Greece. Germany's constitutional court could be asked to rule on the matter.
Meanwhile the European Central Bank kept its interest rate on a cautious one per cent in its meeting Thursday and the bank's chief Jean-Claude Trichet said that the EU plan to help Greece is "a workable framework," making it clear that Greece would not default on its debt.
The Greek finance ministry estimates the country's economy shrank by two per cent in 2009. It issued a five billion euro seven-year bond at the end of last month with a yield of 5.9 per cent.
As the price has gone down, the yield had gone up to 7.63 per cent by Thursday morning.
Greece has set up a semi-state agency to support the banks, and its four biggest lenders National Bank, Eurobank, Alpha Bank and Piraeus Bank have requested guarantees totalling 15 billion euros.
Finance Minister George Papaconstantinou told parliament Thursday that Greece will keep on borrowing in the financial markets.
"Our goal is not the daily fluctuation of interest rates but the restoration of the country's credibility," he said.
Greece is caught in a spiral of expense: as the cost of borrowing has increased for the country and its debt obligations mature, cost cutting becomes more difficult.