Time right to correct budgets, restrain rate for Greece: IMF

PARIS: The time has come for governments to switch their economic fire from stimulus to fighting dangerous budget deficits, the IMF's chief economist said on Tuesday.

Chief economist Olivier Blanchard, in remarks to the newspaper Le Monde, also returned to an argument that tight inflation criteria might be inappropriate.

And he also implied that any support for debt-stricken Greece should be at concessionary rates to avoid a vicious spiral, as borrowing rates for Greece rose to a record of more than 7.8 per cent.

On strategies to leave behind huge government stimulus programmes during the height of the economic crisis, Blanchard said that the main danger now came from the scale of public debts "and of a vicious circle between an explosion of the debt and an increase of the risk premiums (on debt bond markets) and interest rates"

He said: "That is why it is now necessary to concentrate on budget adjustment."

But this should be tempered so as to avoid provoking a drop of consumption, and he suggested policies such as extending the retirement age which would ease public finances and increase working life.

He then said that the crisis should lead to a review of some received ideas such as the idea that stable inflation was enough to ensure economic stabiliy.

He wondered whether it would be justified to have slightly higher inflation and thereby reduce the risks of dangerous deflation.

On the crisis in Greece, he said that Greece had to tighten its belt, but that "to lend it rescue money at high rates is senseless because that would make its recovery impossible."

The two most topical points of his remarks were to question the principle that stable inflation was the best route to economic stability, and that any rescue loans to Greece should not be made at high rates.

Previous remarks by Blanchard suggesting that maybe the general inflation target in advanced countries should be doubled from 2.0 per cent to 4.0 per cent provoked some hostile comment notably in Germany where low and stable inflation is considered essential and to be a corner stone of the eurozone.

This hostility towards his remarks on inflation resurfaced in the German media during recent tough negotiations between Germany and the rest of the European Union over whether a rescue package should be put in place for Greece, with the involvement of the IMF.

Under the deal eventually hammered out, the EU and the International Monetary Fund have set up a three-year stand-by rescue in principle of 30 billion euros ($41 billion) from the EU in the first year and 10-15 billion euros from the IMF, at a concessional interest rate believed to be about 5.0 per cent.

Germany was reluctant to enable Greece easy access to funds at less than market rates.

On Tuesday the rate demanded by the international bond market to lend to Greece for 10 years shot up to a record 7.807 per cent, which is far more than Greece can afford and makes a request for activiation of the rescue increasingly likely.

As Blanchard spoke, IMF officials in Athens were preparing for a planned meeting with mission from the EU and European Central Bank on Wednesday to thrash out remaining details of how the package would be enacted if Greece asked for help, and exactly how much interest would be charged.