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IMF head: Europe needs clear political plan

By Joe McDonald
AP Business Reporter / November 10, 2011

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BEIJING—The head of the International Monetary Fund called on Italy and Greece to show "political clarity" about their debt crises, saying uncertainty about who will lead those countries is fueling financial volatility.

Christine Lagarde was in Beijing for talks with Chinese leaders as Italian Premier Silvio Berlusconi's impending resignation kept Rome's borrowing costs dangerously high and Greek political parties argued over forming a new government.

Lagarde said Chinese leaders are "clearly concerned" about the euro zone but she declined to discuss a possible contribution by Beijing to a bailout.

Asked at a news conference what Europe needs to do most urgently, Lagarde said "political clarity" is "much needed" in both Italy and Greece.

"We don't really understand who is going to come out as the leader, and right now I think that that confusion is completely conducive to volatility," she said. "Political clarity is conducive to more stability."

Worries about Greece have deepened with the breakdown of talks aimed at creating a power-sharing government to prevent the country from slipping into bankruptcy.

The chaos has spilled into unsteady Italy, where the key government borrowing rate spiked at 7.4 percent -- above the level at which Greece, Ireland and Portugal were forced to seek bailouts. Rome's 1.9 trillion euro ($2.6 trillion) debt is too large for Europe to cover.

Italy's president assured the markets that Berlusconi will step down after reforms are passed -- expected Saturday.

Beijing has bought bonds issued by Europe's bailout fund and European leaders are looking to investors such as cash-rich China to help increase its strength, possibly to contributing to a co-investment fund that is being developed.

Chinese officials have said they want to know more about how the proposed fund will function before deciding whether to invest. The 27-nation European Union is China's biggest trading partner and plunging consumer demand has hurt Chinese exports.

Lagarde, a former French finance minister, said developing countries have offered to help increase the IMF's resources but want it to help other troubled economies, not Europe.

"Most of those emerging market economies and their leaders who have indicated willingness to participate in the strengthening of the institution, the IMF, have done so with the explicit indication that it should not be specifically targeted for the euro zone," she said.

Lagarde said she and Chinese officials discussed the status of the euro zone and the bailout fund. She met with the central bank governor and a deputy premier in charge of the economy and was due to meet Premier Wen Jiabao, the top economic official.

"The Chinese authorities are clearly concerned about what it happening in the eurozone," she said. "There is a strong degree of not only curiosity but concern about what is happening in the eurozone."

Beijing has gained a bigger voice in global finance since the 2008 global crisis under changes that made it one of the biggest shareholders in the IMF and its sibling organization, the World Bank.

Lagarde said she and Chinese officials discussed when China's yuan might be added to the basket of currencies used to determine the value of special drawing rights, or SDRs, the accounting unit governments use to hold funds within the IMF. SDRs now are based on dollars, euros, British pounds and Japanese yen.

Lagarde said such a move would be a sign China is a "key player" in the IMF.

"I don't think the time has yet come," she said. "But there is a clear understanding that that will come in due course, and it will be a factor of the internationalization of the currency."

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