Monday April 6, 03:54 PM
IMF 'backs euro for eastern Europe'
LONDON (AFP) - The International Monetary Fund wants crisis-hit EU nations in central and eastern Europe to adopt the euro without formally joining the eurozone, the Financial Times said Monday citing a confidential report.
Struggling countries in the region, hit hard by the global financial crisis, should join the eurozone as "quasi-members" without seats on the governing council of the European Central Bank, according to the report obtained by the FT.
"For countries in the EU, 'euroisation' offers the largest benefits in terms of resolving the foreign currency debt overhang (accumulation), removing uncertainty and restoring confidence," the IMF report said.
"Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance," it added.
However, the FT also said Monday that such an initiative could encounter serious problems because of opposition from eurozone members and the ECB opposed to easing euro entry rules.
The report was compiled one month ago to support a campaign by the IMF, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European countries to back an anti-crisis strategy that would include a regional rescue fund.
The euro, launched in 1999, is the shared currency of 16 member states which comprise the eurozone, home to more than 325 million people.
In addition, both Kosovo and Montenegro have unilaterally chosen to adopt the euro although neither country formally belongs to the eurozone.
Analysts meanwhile poured cold water on the FT report.
"The likelihood of this succeeding seems low to us," said David Woo at Barclays Capital.
"This was purportedly recommended by the IMF a month ago and there have been no signs of positive receptions from the ECB/European Commission/eurozone leaders on this.
"Moreover, there is risk that central and eastern countries will be reluctant to aim for what may be considered a 'second class' eurozone membership unless they are the point of major stress, in which case it could be too late anyway," Woo said.
"We see the report as signalling an IMF preference for foreign exchange stability in the region, which further lowers the tail risk in currencies in the region," he added.
At Capital Economics, analyst Neil Shearing maintained that such euroisation "would not be a panacea for the region's problems," noting that choosing an appropriate exchange rate to make the switch to the euro would be difficult.
He said that if Hungary, for example, were to fix its rate at current levels, "it would lock in the deterioration in household and corporate balance sheets that has already resulted from the recent drop in the forint (the Hungarian currency.)"
The forint has fallen by 25 percent against the euro since October.
Shearing also acknowledged that euroisation could help Hungary as well as the Baltic states with their loan repayments, as more than two thirds of their loans are denominated in foreign currencies.
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