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UPDATE: IIF Says EU, IMF Should Loosen Greek Bailout Targets

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--IIF calls for coordinated monetary-policy easing from ECB, Fed, key emerging-market central banks

--EU, IMF should loosen deficit-cutting goals for Greece, lengthen bailout-loan maturities, IIF says

--Greece may need EUR20 billion to EUR30 billion in additional bailout money, the institute says

--IMF may need to take a more-active role in solving Europe's crisis, including signaling it is open to precautionary loans, IIF says

 

(Adds IIF comments, background and details throughout.)

 
   By Ian Talley 
 

WASHINGTON--The world's biggest private financial institutions Thursday warned European and other world leaders to take urgent steps to prevent the euro crisis from turning into global economic calamity, including calling for coordinated central-bank action.

The Institute of International Finance Inc., in a policy letter to world leaders ahead of a major economic summit next week, also said Greece's emergency bailout program targets should be eased, and the country may need between EUR20 billion ($25 billion) to EUR30 billion more in financing help. The banking group recently negotiated a major debt-restructuring deal for the country.

Charles Dallara, the IIF's managing director, said the International Monetary Fund will likely need to take a more-active role in solving the European crisis beyond existing loan programs and surveillance. The IMF's board and management, he said, should send a clear signal that the fund is prepared to offer its precautionary credit lines to ailing Europe members as one way to ease market fears. The IMF wants the Group of 20 leading industrialized and emerging nations to confirm pledges made earlier this year to boost the fund's coffers by $430 billion.

While the institute has no direct influence on the upcoming economic summit, its comments should alert officials to the types of action markets are seeking in the coming weeks to calm worries that Europe won't contain its debt crisis. The IIF represents more than 450 of the world's largest private financial firms.

In a policy letter to the Group of 20, whose leaders will meet in Mexico next week, the IIF that resolute action by Europe is vital and that "global coordination--beyond Europe alone--is of the utmost importance."

"Whether the global economy is going to lurch from crisis to crisis over the next few years really does depend on the quality of leadership and decisions that are made in the coming days or weeks," Mr. Dallara said during a news conference.

"Europe absolutely needs to chart a course and then articulate the details and a time path," if not at the G-20, then at two euro-zone summits later in June, he said.

The bank group backs direct euro-bank recapitalization with EU emergency funds, a slower pace of budget belt-tightening and a move toward a banking union. Economic and political powerhouse Germany has been particularly resistant to implementing some of those proposals, including direct bank recapitalization. But the pressure for Berlin to concede is building, both politically and in markets. For example, Spain's borrowing costs shot up to unsustainable levels this week even after the EU said it is prepared to lend the county EUR100 billion to inject fresh capital into its weak banks.

Mr. Dallara said a slowing global economy amid Europe's crisis means "four or five" of the world's key central banks should ease monetary policy, including the U.S. Federal Reserve and the European Central Bank.

The IIF's remarks on Greece may help encourage Greek voters to back a political party that supports the EU-IMF bailout program, instead of the party that is against the joint EU-IMF loans, in Sunday's recall elections. Economists said a rejection of the loan program would almost certainly lead to Greece defaulting on its debt obligations, potentially sparking financial panic throughout the euro zone.

"In an environment of severe economic contraction, the pace of short-term budgetary adjustment needs continuous examination for potential easing," the IIF said.

That point "may be applicable well beyond Greece," allowing for better economic growth prospects in Europe and beyond, the group said.

The IIF also said Europe needs faster financial and fiscal integration, including some form of debt-redemption fund or euro-zone bonds, both of which would spread the weak countries' risk across the monetary union and help push down borrowing costs for ailing members.

EU leaders should also outline a plan for centralized banking supervision, regional bank-deposit insurance and common-bank recapitalization from the area's bailout funds. Economists said deposit insurance is one of the measures needed to prevent the kind of damaging banks runs that could come from a Greek default or euro-zone exit.

 

Write to Ian Talley at ian.talley@dowjones.com.

 

(END) Dow Jones Newswires

June 14, 2012 17:02 ET (21:02 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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