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IMF chief's arrest won't stop Greek bailout debate

MELISSA EDDY

Published: Sunday, May 15 2011 8:55 p.m. MDT

A sign that reads "Greek manufactured products _ Closing Down" is displayed in a storefront in central Athens in a clothing store going out of business, on Friday, May 13, 2011. Greece's major financial crisis has taken a heavy toll on the country's retail sector, and pushed unemployment up to 15.9 percent in February.

Kostas Tsironis, Associated Press

BERLIN — The arrest of IMF chief Dominique Strauss-Kahn complicates a key European meeting on whether to give Greece billions more in aid — but experts insisted one man's troubles won't keep the 17 eurozone nations from trying to contain a debt crisis that threatens them all.

Eurozone financial leaders are to discuss Greece's deteriorating economy Monday at a Brussels meeting where experts will brief them on the situation in Athens. Key questions include what conditions to put on more help to the debt-strapped nation, with European leaders unhappy at what they see as limited Greek efforts to raise money by selling government property.

Strauss-Kahn was arrested Sunday in New York on suspicion of sexual assault on a hotel maid.

Despite the arrest, the International Monetary Fund said in a statement it remains "fully functioning and operational." The IMF Executive Board convened an informal session Sunday and made Strauss-Kahn's deputy, John Lipsky, acting managing director while its chief was unavailable.

The Washington, D.C.-based lending body also sent Nemat Shafik, a deputy managing director who oversees IMF work in several EU countries, to Monday's eurozone meeting to replace Strauss-Kahn.

Strauss-Kahn had to cancel his Sunday meeting with Chancellor Angela Merkel in Berlin, where the German public is deeply skeptical about putting up any more money for Greece. Germany, as Europe's largest economy, provided a large chunk of the €110 billion ($157 billion) bailout for Greece from the European Union and the IMF last year.

Strauss-Kahn was scheduled to be arraigned Monday.

Greek government spokesman Giorgos Petalotis insisted the arrest would not affect his nation's efforts to resolve its financial woes.

"The Greek government deals with institutions, not individuals, and continues unimpeded to implement the program that will get it out of the crisis," Petalotis said.

German Finance Minister Wolfgang Schaeuble struck a similar tone, saying the eurozone meeting would go ahead as planned. And European politicians had already gotten used to the idea that Strauss-Kahn may leave his post soon to run for president of France next year.

Yet others said Strauss-Kahn's immediate departure from the financial stage adds additional uncertainty to the already difficult situation in Europe.

"The leadership vacuum at the IMF comes at a highly inopportune time for Europe, which is teetering on the brink of a full-blown debt crisis," said Eswar Prasad, a professor of international economics at Cornell University and a former IMF official.

Many investors believe that Greece's financial troubles are so overwhelming that a Greek default or a restructuring that would give creditors less than the full value of their bonds is inevitable. But that would be a serious blow to the euro, and eurozone governments and the European Central Bank appear determined to prevent it.

Merkel has stressed that her government will need clear conditions for any new Greek loans before it will back more help. But Schaeuble has conceded that if the experts' full report in June shows that Greece can't pay its debts, something more will have to be done.

The IMF put up €30 billion ($43 billion) of that Greek loan and also supplies expertise in assessing whether Greece and other countries that get emergency loans are living up to the conditions attached to them.

A €78 billion ($111 billion) bailout for Portugal was also on the agenda for Monday's meeting in Brussels, as is Ireland's progress in dealing with the financial morass that led to its own EU-IMF bailout. With the terms of the Portuguese bailout largely decided, EU finance ministers are expected to signal approval of that deal.

Although eurozone ministers were talking about Greece, a new bailout announcement was not planned for Monday. Instead, investors expected a general statement of support, followed by days or weeks of more haggling.

Marco Valli, chief eurozone economist at UniCredit, said Greece's troubles were separate from those of Strauss-Kahn, and he expected a decision on more help for Greece in the near future.

"There is no way that just because the IMF's chief gets into personal trouble that Greece would be left alone," Valli said. "Maybe it can have some impact on timing, but our view is that this is not going to have a meaningful impact on the bottom line, which is that Greece would get a second bailout package."

Other analysts agreed that the IMF will simply navigate through the upcoming difficulties.

"The IMF is not a one-trick pony," David Buik at BGC Partners in London. "European markets may be damaged by this news for a few hours but there is plenty of depth to the IMF."

AP Business Writer Gabriele Steinhauser contributed from Brussels and Demetris Nellas from Athens, Chris Rugaber in Washington D.C.

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