May 24, 2010 / 7:27 PM / 9 years ago

UPDATE 1-IMF chief economist: doubts over Greek aid remain

* Greek past, doubts over aid keep markets “concerned”

* Other euro zone members don’t need such drastic measures

* No U.S. contagion but adjustment plan needed - Blanchard

By John Irish

PARIS, May 24 (Reuters) - The IMF’s chief economist warned on Monday that markets will remain concerned until doubts over the European Union delivering on its aid promise to the Greek government and Greece’s debt-payment history are resolved.

“The markets are wondering if Greece will be able to repay its debt or not,” Olivier Blanchard said in an interview to be published on Tuesday in La Tribune newspaper. “Given the behavior of Greek governments in the past, their uncertainties are understandable.”

There are also doubts about the EU’s ability to deliver the money it has promised to finance the Greek government and about the European Central Bank’s policies, Blanchard said.

EU governments are trying to regain investor confidence after months of turmoil that have pushed many euro zone states’ borrowing costs sky high and led to a 110 billion euro ($136 billion) bailout of Greece plus a 750 billion euro safety net to try to prevent contagion. [ID:nSGE64N01P]

Blanchard said Greece must show determination in implementing the plan agreed with the EU and the International Monetary Fund, parliaments across the euro zone must agree on the measures and the ECB must clarify its position and convince markets it would continue to buy government bonds.

Germany’s parliament approved a law on Friday allowing Europe’s biggest economy to contribute to the emergency debt package despite broad public opposition.

A clear majority of lawmakers in the lower house backed the bill. But in a sign of domestic pressure piling on Chancellor Angela Merkel, 10 members of her own center-right coalition voted against it or abstained.

U.S. ADJUSTMENT PLAN

While Greece has no alternative but to accept the austerity measures, Blanchard echoed comments by IMF chief Dominique Strauss-Kahn that, to avoid dampening growth, big euro zone countries should not focus too quickly on narrowing budget deficits.

“Other European countries do not need to take such drastic measures as Greece,” he said. “They are more credible to begin with, have less debt and can afford a more gradual adjustment, and therefore limit the negative impact ... on growth in the short term.”

Barring “catastrophic events,” Blanchard said the debt package from Europe and the IMF would be enough.

The United States did not have to worry about contagion but, given its very large deficits, it will also need to introduce an adjustment plan, albeit more gradually, he said.

“The behavior of markets shows that the U.S. Treasury bills remain the safe haven,” Blanchard said.

“However, the depreciation of the euro is not good news for the United States. This will increase pressure on other countries, especially emerging Asian countries, to revalue their currencies.” (Editing by John O’Callaghan)

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