Playing with fire: IMF chief warns failure to get grip on Greek crisis threatens global economy



Desperate international efforts to save Greece from bankruptcy were under way last night as fears grew that the country's economic crisis threatened the 'whole world economy'.

Experts said it appeared to be a question of if, not when, Greece defaults on its massive debts, sending shockwaves across Europe.

Bank losses across the Continent would be enormous, and there is mounting concern that Portugal and Ireland would then be hit by a 'domino effect' as international markets turned on other debt-laden nations.

Clash: A Greek protester hits a police officer during a riot on Wednesday, which escalated from a major anti-austerity rally

Some economists believe the euro could disintegrate as a single currency, causing unprecedented turmoil.

Last night the International Monetary Fund issued an extraordinary warning to debt-laden nations, warning them they were 'playing with fire' unless they took immediate steps to reduce their budget deficits.

The IMF said a lack of political leadership in dealing with the debt crisis in countries including the United States could create major financial volatility in coming months.

Jose Vinals, director of the IMF's monetary and capital markets department, said: 'You cannot afford to have a world economy where these important decisions are postponed because you're really playing with fire.

Warning: IMF chief Jose Vinals said any delay on dealing with the Greek crisis is 'really playing with fire'

'We have now entered very clearly into a new phase which is, I would say, the political phase of the crisis.'

Another giant bailout for Greece appears inevitable to try to stave off disaster, though there are doubts about whether the country is sufficiently politically stable to agree to austerity measures attached to it.

Germany and France set aside differences over how to respond, insisting last night that a new rescue package for Greece must be agreed as soon as possible.

In a sign of the increasing degree of international concern, and China's emergence as the coming economic superpower, Beijing weighed in with a promise of help.

It said it had a vital interest in countries across Europe overcoming their debt woes and was increasing its holdings of euro debt, but gave no figures or timeframe.

'Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis is vitally important for us,' vice foreign minister Fu Ying said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy held emergency talks in Berlin after a public dispute over whether private investors, rather than taxpayers, should be forced to assume a greater burden to resolve the crisis.

'There is no time to lose,' Mr Sarkozy told reporters with Mrs Merkel at his side.

France's banks are particularly exposed to Greek debt and Mr Sarkozy is warning that the row threatens the future of the euro.

Priorities: German Chancellor Angela Merkel and French President Nicolas Sarkozy have differing views on the importance of the Greek problem because of their differing exposure

Britain is resisting attempts to be drawn into having to stump up more cash towards a Greek rescue package through a European bailout mechanism.

Chancellor George Osborne insists eurozone countries must shoulder the burden.

The UK was not involved in an original bailout for Greece last year, which was funded via bilateral loans within the single currency area.

But European Central Bank officials have warned the EU bailout fund could have to double to 1.5trillion euros, equal to more than £1.1trillion.

Lord Lamont, chancellor under Margaret Thatcher, said: 'Make no mistake about it, this is a threat to the whole world economy.

'This could send shockwaves not through just the neighbouring countries of Greece but the whole European monetary system.'

Allister Heath, editor of the City AM newspaper, said 'a Greek tragedy would all too soon become a British one'.

Analysts expected as much as three-quarters of Greek debt to have to be written off, wiping out most Greek financial institutions and costing European banks £100billion.

'Britain is especially vulnerable because London remains at the heart of Europe's financial networks, the nerve centre for the management and allocation of capital across the continent,' Mr Heath added.

This could be another Lehman moment

The difference in opinions over the Greek debt crisis between Angela Merkel and Nicolas Sarkozy may well be explained by the fact the French banking system is at more immediate risk from any meltdown than its German counterpart.

France is the most exposed of any developed country to Greece reneging on its huge debts.

The French are sitting on a £35billion exposure compared with £21billion for Germany, according to the Bank for International Settlements.

Fears: Economists say the turmoil in Greece could have as much impact on the world economy as the collapse of Lehman Brothers bank

UK banks have a relatively small exposure of around £9billion.

While the Germans wanted creditors to accept some write-offs on their lending to Greece, the French were reluctant – understandably so given the threat that would pose to their banking system.

The three top banks in France – BNP Paribas, Societe Generale and Credit Agricole – have already been warned they face a downgrade by credit rating agency Moody's.

The Greek economy is relatively small and in itself would not be enough to bring down eurozone banks.

But, as economists point out, the turmoil in Athens could be another 'Lehman moment', threatening the entire banking system in Europe and beyond because of the possibility of contagion in other weaker euroland nations such as Ireland, Portugal and Spain.

Rating agencies and the European Central Bank have both warned any sort of debt default by Greece is likely to send panic through the international money markets and push up borrowing costs for these countries.