Domestic politics imperil IMF deals in Europe

Thu Jan 7, 2010 10:23am EST
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By Peter Apps, Political Risk Correspondent - Analysis

LONDON (Reuters) - From Ukraine to Iceland, domestic politics and popular discontent are threatening International Monetary Fund (IMF) rescue deals, unsettling investors who view them as vital for financial recovery.

At the height of the global crash, many governments promised painful belt tightening in return for IMF loans but selling these economic reforms to their electorates has proved tough.

That leaves countries facing standoffs with the fund, which could panic markets and leave governments without the cash for public salaries and sovereign debt payments.

"There were a lot of unrealistic expectations last year about how easily these reform packages would solve crises," said senior research fellow Vanessa Rossi at London-based think tank Chatham House.

"But like any debt renegotiation, it's going to be a difficult, messy process and they are going to get unstuck from time to time. It's going to last several years. You can't ignore the democratic process."

Iceland's economic aid package was thrown into doubt this week when its president rejected a bill to repay Britain and the Netherlands more than $5 billion lost by savers after its banking sector imploded in 2008.

The "Icesave" bill is opposed by 70 percent of Icelanders who complain it leaves them bearing the cost of the banks' mistakes. But rejecting it could imperil EU membership efforts, financial support from fellow Nordic countries and an IMF lifeline. Ratings agencies downgraded Iceland after the move.