The International Monetary Fund pushed European policy makers toconsider writing off some aid to Greece, widening the fight to keepthe 17-nation euro zone from splintering.

“The Greek debt will have to be addressed,” IMF ManagingDirector Christine Lagarde said in Washington yesterday. The IMFhas indicated that additional aid for Greece will have to come fromEurope, suggesting that the euro area may need to consider losseson bonds held by the European Central Bank or loans extended bygovernments.

Greece's financing gap won't be solved with the budget measuresbeing discussed because its growth prospects are too weak, Lagardesaid at the Peterson Institute for International Economics inWashington. She said efforts to find 11.5 billion euros ($15billion) in additional savings won't be enough to shore up thebailout jointly supervised by the IMF, the European Commission andthe ECB.

The comments by Lagarde, who is scheduled to meet GermanChancellor Angela Merkel in Berlin tomorrow, put pressure on theeuro zone to grant Greece further relief by restructuring itsdebts. Greece has received 240 billion euros in aid pledges in apair of bailout packages. Investors took losses in a debt exchangethis year, losing 53.5 percent of the face value of their holdingsand reducing the country's debt by about 100 billion euros.

Because there is so little debt left in private hands, Europemay now need to pick its moment to tackle so-called official-sectorinvolvement, said Carsten Brzeski, senior economist at ING Groep NVin Brussels.

“This is exactly the road we're taking, but it is politicallyvery, very touchy,” Brzeski said in a telephone interviewtoday.

Brzeski estimated the ECB holds about 40 billion euros in Greekdebt acquired through its Securities Market Program, which so farhas maintained seniority over other creditors, as well as morebonds accumulated through other operations. Euro-area nationsprovided about 53 billion euros in bilateral loans to Greece aspart of an initial bailout program.

German officials so far have ruled out debt writedowns. MichaelMeister, finance spokesman for German Chancellor Angela Merkel'sChristian Democratic Union, dismissed speculation that Greece'sofficial creditors will be forced to write off some of theirexposure.

“How could we possibly do that,” he said in a BloombergTelevision interview yesterday. “Where would it stop? We're talkingabout loans from as recently as last year. The German parliamentwould not go with it.”

Greece must keep cutting its debts as a condition of accessingits bailout funds while its economy remains mired in a fifth yearof recession. Two Greek elections have produced a shaky governingalliance of pro-euro politicians under constant attack from theanti-bailout opposition.

The so-called troika that represents international lenders hasagreed to take a week-long break from inconclusive talks withGreece to carve out the new budget package. Lagarde's commentssuggested an agreement may have to go beyond these measures.

Lagarde signaled that the IMF won't budge on Greece's targets,which call for reducing debt to 120 percent of its gross domesticproduct by 2020. This goal “is still clearly the horizon that isset in order to measure the efforts to be undertaken by then,” shesaid in yesterday's speech.

She continued to indicate that Greece may get more time to meetits obligations, noting that the IMF has recommended slowing thepace of fiscal adjustment for Portugal and Spain. At the same time,Lagarde said the euro area needs to find a permanent solution.

“The last thing we want is for programs to be off track and offtrack and off track again,” Lagarde said.

Bloomberg News

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