Euro zone includes IMF in backup bailout for Greece debt

In Brussels, the 16 eurozone nations agree to include the IMF in a backup bailout for Greece debt.

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    From left, French President Nicolas Sarkozy, Spain's Prime Minister Jose Luis Rodriguez Zapatero, Greek Prime Minister George Papandreou, and German Chancellor Angela Merkel shared a word during a summit meeting Thursday.
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On Greece's independence day, leaders of 16 European nations hammered out a bailout mechanism for the financially troubled country that would hit its residents hard.

Greece would only get the bailout if it could no longer borrow from financial markets. The interest rates on those bailout loans wouldn't necessarily be as low as more stable euro nations enjoy. Inevitably, Greeks would earn less income and pay more taxes.

Strangely, one of the more helpful aspects of the plan from the Greek government's perspective is the involvement of the International Monetary Fund in any bailout.

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IMF unloved but needed

The IMF is not loved in much of the world. The Washington-based international lending agency forces troubled governments to take tough and unpopular measures to get their fiscal houses in order. But in the case of Greece, it offers two potential advantages.

One is its debt-restructuring expertise. The second is that the IMF could play a key role in keeping a lid on political tensions inside Greece and between Greece and the eurozone nations.

With the IMF calling the shots, the Greek government can blame international bureaucrats for austerity moves when voters begin to complain. The IMF also can act as a buffer between Greece and the rest of Europe.

"One of the advantages of having the IMF doing the negotiations ... is that you don't get neighbors angry with other neighbors," says Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington and former senior staffer at the IMF.

IMF more lenient?

In fact, the IMF's conditions on Greece might turn out to be more lenient than euro nations alone might have provided.

"The Germans would be tougher," says Allan Meltzer, professor of political economy at Carnegie Mellon University. "The main problem with the IMF is enforcement. It has a much better record of putting down conditions than enforcing conditions."

Under the plan, hammered out Thursday at a European Union summit meeting in Brussels, all 16 euro nations would have to approve loans to Greece for European aid to flow.

European nations would provide the bulk of the funding. But at the insistence of Germany, the IMF's contribution would be substantial.

Greeks still face a difficult adjustment. Its independence day celebrations Thursday were stripped of their usual display of tanks and other military equipment in a bid to save money.

It's only the beginning of what's expected to be a tough and rocky path.

The threat of a Greek debt could undermine the euro, one of the world's most important currencies.

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