The International Monetary Fund could intervene in secondary bond markets alongside the euro-zone's bailout fund and expects the size of Greece's second rescue package to be modified, an IMF official said Wednesday.
The Washington-based group would create a special purpose vehicle to buy bonds under stress in secondary and primary markets, said Antonio Borges, director of the IMF's European department.
The move would aid countries such as Spain and Italy, which face rising costs for financing in capital markets. But, Borges said they have a problem of market confidence rather than solvency, which interventions could mend.
The IMF's involvement in euro-zone secondary bond market purchases would give an "additional element of credibility because of the conditionality the IMF requires," said Borges.
Euro-zone leaders agreed earlier this year that the powers of their bailout vehicle, the European Financial Stability Facility, should be expanded and allowed to intervene in secondary bond markets. All national parliaments have agreed, except Slovakia and the Netherlands, which are expected to approve the terms later this month.
The European Central Bank can only intervene in secondary bond markets.
Borges also said the EFSF should use its resources to persuade investors to return to markets. One option is to incentivize investors with asset protection guarantees from euro-zone governments.
Meanwhile, Borges said that the size of Greece's second bailout package, now estimated at EUR109 billion, is "outdated."
"All figures were extremely tentative," he said, adding that the next program will have to place greater emphasis on generating economic growth instead of focusing mainly on Greece's balance sheet.
Borges said that a new program for Greece is necessary in order to avoid revising the Greek program targets and policy conditions "every three months," as has been the case with its first bailout.
Last year, Greece signed up to a EUR110 billion loan with fellow euro-zone members and the IMF in exchange for dramatic fiscal and economic reforms.
"We have to accept the plan won't be put in place" as it stands, Borges said. Still, he stressed that the Greek government must agree to promised reforms to receive the loans.
Negotiations on the disbursement of the sixth tranche of the first bailout are in no rush, he said, despite initial statements from the Greek finance ministry that it faced a mid-October payment deadline.
Euro-zone finance ministers also said Monday at a meeting in Luxembourg that Greece had enough cash to last it through mid-November.
The troika review of Greece's economy is now expected in the second half of October.
Borges highlighted European banks at particular risk to the ongoing euro-zone debt crisis. He said that all large regional banks should be recapitalized in order to boost market confidence. The recapitalization should come from governments if not the private sector, he said.
Otherwise, Europe could face a credit crunch, said Borges.
But bank resolutions must take a more pan-European approach, so that the cycle of national bailouts to troubled banks, which in turn puts government balance sheets under stress, is cut. He called for a European resolution mechanism and deposit insurance fund.
Singling out Dexia, which has come under acute stress this week, Borges said France and Belgium have no choice but to work together to resolve the issue.
