IMF chief worried about Europe domino effect

Glenn Somerville
Reuters

The head of the International Monetary Fund said on Thursday he was worried that EU leaders’ piecemeal approach to Europe’s debt crisis was encouraging markets to pick off weak countries one by one.

Dominique Strauss-Kahn appeared to endorse the idea of common euro bonds, saying they could be a useful tool, but added the political will to give power to the center of Europe was the main hurdle to their creation.

“I am worried, and that’s why I am urging the Europeans … to provide a comprehensive solution because this piecemeal approach … obviously doesn’t work,” Strauss-Kahn told Reuters. “The markets are just waiting for what’s next.”

Due to its cumbersome decision-making structure, the euro zone has tended to offer countries such as Greece and Ireland rescues only once they were “at the edge of the cliff,” he said. That approach has created a domino effect.

Interviewed at a Thomson Reuters Newsmaker event, Strauss-Kahn spoke as European Union leaders began a two-day summit at which they agreed changes to the European Union’s governing treaty to create a permanent mechanism for handling financial crises.

“You can’t have a single currency, especially in times when you have troubles, without having more coordination and economic policy,” Strauss-Kahn said, also calling on the EU to revisit with more rigor the bank stress tests it carried out earlier this year.

Saying decision-making among the 16 countries of the euro zone was too slow, Strauss-Kahn said he was confident that the resources to address countries’ debt problems were available in Europe but “fair or unfair, there’s skepticism in the markets so the problem has to be addressed.”

SPAIN SAFE

Strauss-Kahn played down worries that Spain faced perils like those confronting debt-strapped Greece and Ireland, recipients of massive bailouts from the European Union and IMF.

“I don’t see that the risks for Spain will be that big in 2011,” he said. “It doesn’t mean there is no risk … but I’m not that pessimistic about the Spanish economy.”

Spain, the euro zone’s fourth-largest economy, paid a hefty premium at a bond auction on Thursday, a test of investor appetite a day after credit ratings agency Moody’s said it may cut the country’s rating.

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