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Lagarde says Greek program should be "rooted in reality"

International Monetary Fund Managing Director Christine Lagarde gestures as she answers questions during a news briefing at the presidential
International Monetary Fund Managing Director Christine Lagarde gestures as she answers questions during a news briefing at the presidential

By Lesley Wroughton

MANILA (Reuters) - An agreement among Greece's creditors on how to reduce its large debt pile should be "rooted in reality and not in wishful thinking," the head of the International Monetary Fund said as she heads into a tense meeting with European leaders.

Christine Lagarde, the IMF's managing director, canceled the last leg of her visit to Asia, skipping a Southeast Asian summit in Cambodia, to return to Brussels for a meeting on Tuesday of the Eurogroup on Greece.

As she left the Philippines, Lagarde told Reuters she would push for a permanent solution to Greece's debts to avoid prolonged uncertainty and further damage to the Greek economy.

To Lagarde, that means countries in the euro zone should send a strong signal they remain committed to Greece by agreeing to reduce the debt Athens owes them.

"I am always trying to be constructive but I am driven by two objectives," she said in an interview, "to build and approve a program for Greece that is solid, that is convincing today, that will be sustainable tomorrow, that is rooted in reality and not in wishful thinking.

"The second objective is to maintain the integrity, credibility and quality of advice that we are giving, not for the Fund itself, which obviously is a concern of mine, but to lend that to the Europeans because that is what they are interested in," she said late on Saturday.

In an unusually public airing of disagreement that flared during a news conference in Brussels on November 13, Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, said the target of reducing Greece's debt to 120 percent of gross domestic product by 2020 should be moved by two years to 2022.

Appearing surprised by Juncker's statement, Lagarde disagreed, insisting the target of 2020 should remain.

The stand-off threatens to further delay the next 31.5 billion euro tranche of Greece's bailout, pushing the country close to bankruptcy. Greece's successive bailouts have already suffered setbacks from elections and resistance to reforms.

"They might resent me ... but that is in their interest," Lagarde said of the European creditors. "The two objectives are critical for me, both of them."

Taking a hit on Greek debt is politically difficult for politicians like Angela Merkel, the German chancellor, facing an election in 2013.

Greece is heading into its sixth year of depression that has wiped a fifth off its economic output and sent unemployment to a record high -- one in four Greeks are out of work.

Bickering among its creditors could cause more economic damage for Greece if markets do not believe that Athens has the support of Europe and is concerned about the IMF's commitment to the bailout.

Lagarde has previously said the IMF does not walk away from countries, but without a European deal on Greece's debt and financing she cannot take the matter to the IMF board of member countries for approval.

"(Markets) are not going to be convinced today that the solution holds in the medium term," she said of Greece's debt problems. "And that is what we need to focus on."

One option is for euro zone countries to agree on cutting the interest rate on outstanding Greek debt -- some have suggested reducing it to zero. Another option is combining interest rate reductions with prolonging the repayment period, a move that could calm markets since the bulk of the debt matures in 2021/2022.

"The sense I have ... is that the Europeans have taken the view that the zone has to stay a zone of 17 member states," Lagarde said of Europe's political commitment to Athens.

Bundesbank President Jens Weidmann, who is also a member of the European Central Bank's governing council, said on Friday that Greece levels were unsustainable but that it would have to earn a writedown by getting its budget into shape.

IMF CREDIBILITY AT STAKE

The IMF's role in the European debt crisis has forced it into new territory. It has operated alongside the European Union and European Central Bank as part of a "troika" of emergency lenders to Greece, Ireland and Portugal.

The row with Europe over how to deal with Greece's debt is a test for the credibility -- and independence -- of the IMF.

In Malaysia and the Philippines last week, where the IMF's prescriptive policies were blamed for exacerbating the 1997/1998 Asian financial crisis, Lagarde was confronted with questions about how tough she was prepared to be with Europe and the United States.

While acknowledging the IMF's mistakes in Asia, she said the Fund could use its surveillance to pressure countries to act.

"I am not just concerned about the perception of the Fund's credibility, I'm concerned about the real credibility of the Fund," Lagarde said.

She said it was important that the IMF remained even-handed in its advice. "The real credibility is not for ourselves, not for the satisfaction of the egos of Mr So-and-So, or Mrs So-and-So, but for what goodwill we have to offer to the membership," she said.

Lagarde expressed confidence that the United States would be able to avoid its looming budget crisis and said the IMF would press Washington to act. "We are going to be there, maybe discreetly to begin with as we do, and maybe more publicly," she added.

U.S. President Barack Obama and his Republican rivals are in talks aimed at avoiding what has been dubbed "a fiscal cliff" at the end of the year, which economists have warned could push the economy into recession.

Without an agreement by Congress, the economy will be pushed over the "fiscal cliff" of spending cuts and tax increases worth about $600 billion.

"It will take time because people are going to want to save face and reach out and close as much as the gap as they can," she added.

(Editing by Robert Birsel and Paul Tait)

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