Public sector holders of Greek debt, such as the European Central Bank, may need to take a haircut if a private sector restructuring is not enough to make Greece's debt burden sustainable, IMF Managing Director Christine Lagarde said on Wednesday.
Talks with private sector creditors hit an obstacle on Monday when euro zone ministers rejected their demands for a 4 percent coupon on new, longer-dated bonds in exchange for existing debt.
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Greece is desperate for a deal to ensure funds from a 130 billion euro rescue plan drawn up by European partners and the International Monetary Fund arrive before 14.5 billion euros of bond redemptions fall due in March.
Charles Dallara, who negotiates in the name of private bondholders through the International Institute of Finance (IIF), was in Paris to co-chair an internal meeting of creditors on Wednesday to discuss latest developments in the talks.
"The balance between the participation of the private and the public sector is a concerning question," Lagarde told journalists in Paris on Wednesday, without mentioning the ECB by name.
"If the level of Greek debt held by the private sector is not sufficiently renegotiated, then public sector holders of Greek debt should also participate in the efforts," she said.
The European Central Bank is estimated to hold 40-45 billion euros in Greek debt in the portfolio of bonds bought under its controversial Securities Markets Programme.
The Frankfurt-based bank ruled out earlier this month participating in the restructuring of Greek debt.
The bond swap is meant to cut 100 billion euros from Greece's debt burden of over 350 billion, in a bid to ultimately slash its debt from around 160 percent of GDP to a more manageable 120 percent of GDP by 2020.
URGES MERGING ESM, EFSF
The IMF chief, who is seeking support from national governments for a $600 billion increase in the Fund's resources to cope with the crisis, urged the European Union to combine its temporary EFSF bailout fund and the permanent ESM mechanism to boost its own firewall to stem contagion from crisis-hit Greece.
"If the two of them could make a common European pot, that would send a very strong sign of confidence in Europe," Lagarde told Europe 1 radio earlier on Wednesday.
French sources say combining the two facilities could provide an effective lending capacity of 750 billion euros.
German Chancellor Angela Merkel has resisted calls to let the two funds to operate simultaneously, rather than allowing the ESM to replace the EFSF as originally planned. France is in favour of the measure.
Lagarde said the situation in Greece remained extremely difficult and it was essential for the world economy that it should be prevented from spreading to larger euro zone economies such as Italy and Spain.
She said the next few weeks would be crucial to the world economy this year, after the IMF on Tuesday cut its world economic growth forecast to 3.3 percent in 2012.
"If the right decisions are taken in the coming weeks, not only at the heart of the euro zone -- which is essential -- but also in the United States, Japan, in the major emerging economies, then the end of 2012 will be better than the beginning," she said. "But only if the right decisions are taken."
She said measures were needed to boost growth and competitiveness in many industrialised economies, while emerging economic powers with current account surpluses like China needed to take further steps to boost internal demand.
"The world economy is on a narrow path with little margin for manoeuvre," she said. "America's debt and deficit - the lack of a medium-term plan to reduce it - that is a real problem. The situation is comparable in Japan."