IMF chief warns on cost of Greek exit from euro

Wed May 16, 2012 7:20pm EDT
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By Harry Papachristou and Lefteris Papadimas

ATHENS (Reuters) - IMF chief Christine Lagarde warned of "extremely expensive" consequences were Greece to leave the euro zone, a once taboo possibility that European leaders have begun to discuss openly after the nation descended into political chaos.

Fears that Greece's dire state could drag the euro zone deeper into crisis rattled financial markets across the globe, as a little-known judge was installed to head an emergency government which will lead the nation to new elections on June 17.

Lagarde on Wednesday called on Greek leaders to show their resolve to keep the country in the euro by sticking to its bailout deal with the International Monetary Fund and European Union, the terms of which have inflicted great suffering on its people.

However, she told Dutch television that any Greek departure from the euro "would be extremely expensive and hard, and not just for Greece".

Greece's economic crisis turned into a full political crisis after an inconclusive election on May 6 when parties opposed to the austerity terms of the 130-billion-euro ($168 billion) bailout made strong gains, raising the chance that the rescue funds could be halted, pushing the country towards bankruptcy and out of the euro.

A failure of pro- and anti-bailout parties to agree a coalition forced President Karolos Papoulias to call the second election in as many months, and prompted him to say that the chaos risked causing panic and a run on bank deposits.

The IMF's sister organization, the World Bank, said the crisis could spread beyond Greek borders to far bigger euro zone economies that are in trouble.

"The core question will be not Greece, but Spain and Italy," World Bank President Robert Zoellick said. If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets.   Continued...

Newly appointed caretaker Prime Minister Panagiotis Pikrammenos (2nd R) shakes hands with Greece's President Karolos Papoulias during their meeting in Athens May 16, 2012. REUTERS/John Kolesidis