Deflation the only option for Greece: IMF chief

VIENNA (Reuters) - Deflation is the only way Greece can effectively tackle its debt problems, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn was quoted on Monday as saying.

“The only effective remedy that remains is deflation,” Strauss-Kahn told Austrian magazine profil in an interview. “And this is exactly what the European Commission has correctly recommended.”

Euro zone finance ministers approved a 30-billion-euro ($40 billion) emergency aid mechanism for debt-plagued Greece on Sunday, but stressed Athens had not requested the plan be activated yet.

Concern about Greece’s ability to manage its 300 billion euro ($400 billion) debt pile had grown last week, as investors dumped Greek stocks and bonds and ratings agency Fitch downgraded Athens’s debt by two notches.

In the interview, Strauss-Kahn also addressed how the wider euro zone could retain social security programs while handling expanded state debt, suggesting pension benefits must be trimmed and higher inflation targets may be an option.

“The way out of debt in most countries is led by a reform of the pension or health care system,” he said, adding that raising the retirement age could be one way of cutting expenditure.

Asked if he was in agreement with a February paper written by IMF chief economist Olivier Blanchard, which suggested higher inflation targets for the world’s major central banks, Strauss-Kahn said the IMF was aiming to bring up new ideas.

“We must also discuss, in the coming years, how high inflation should be. This question is extremely important.”

Writing by Dave Graham and Brian Rohan via Berlin Newsroom, editing by Mike Peacock