The real risk is not so much Greece itself but that others, such as Portugal and Spain, would follow it into crisis, writes PAT McARDLE

THE COMING of age of emerging countries is reflected in their membership of the new Group of 20 (G20) established last autumn.

This weekend’s meetings of the International Monetary Fund (IMF) are, in turn, dominated by the G20.

The list of items on the agenda is long. It includes all the issues set out in two major background reports prepared by IMF staff. One is the Global Economic Outlookand the other is the Global Financial Stability Report.

The first concludes that the recovery is proceeding better than expected but at varying speeds. This is not necessarily good news for us, as Europe and the US are among the slower growing regions. Indeed, the IMF is more concerned than most about the outlook for the US.

It also includes forecasts for Ireland that are more pessimistic than those of the Government in the recent budget and most domestic forecasters.

The challenges are well known. They include:

- finish bailing out the banks;

- swift resolution of non-viable institutions and restructuring of those with a commercial future;

- start to get budget deficits down;

- credible fiscal adjustment strategies with clear timelines should be devised;

- withdraw exceptional monetary stimulus;

- tighten policy in emerging countries which are beginning to overheat;

- combat structural unemployment and avoid large increases in poverty by maintaining benefits;

- agree regulatory reform and deal with the “too big to fail” issue;

- devise mechanisms to make banks pay for crises;

- make the financial system safer by better regulating derivatives trading;

- rebalance global demand – in addition to correcting excessive public deficits, countries with balance of payments surpluses should stimulate domestic demand and let their currencies appreciate.

Difficult as these issues are, they are likely to be overshadowed by a more immediate concern.

The Global Financial Stability Report's main conclusion is that the risks to financial stability have eased as the economic recovery has gathered steam, but there is an important rider to the effect that concerns about advanced-country sovereign risks could undermine stability gains and prolong the collapse of credit.

This is clearly a reference to Greece, although that country is not explicitly identified.

The authors could hardly have expected that Greece would effectively hijack the IMF meetings, but this is what has happened and much of the G20 discussion will be devoted to this emergency situation.

The fund’s involvement with Greece is unusual. Initially, the feeling was that the euro zone should look after its own problems. Germany, however, insisted on IMF involvement as much for domestic political reasons as anything.

However, the reality is that the EU does not have a facility for monitoring emergency packages of this nature and no experience in doing so.

The EU also struggled to find a way of channelling assistance to Greece without infringing the “no bailout” clause of the Maastricht Treaty and getting on the wrong side of the German constitutional court. It may yet regret its collegiality.

The IMF is well used to dealing with situations like this. Its usual medicine is fiscal austerity, higher interest rates and devaluation – it is both feared and disliked for this reason. Euro membership rules out the last two approaches, so all the emphasis has to be on budget cutbacks.

The IMF would insist on tougher budgetary action – it may well do so yet as it has a team in Athens at the moment as part of the joint EU-IMF approach. This would most likely be resisted by Greek interests. The solution which the fund would most likely adopt is to let Greece run out of funds. Once it is unable to pay social welfare and public servants’ pay, the penny will drop with unions and politicians alike.

Matters like this, together with the size and conditionality of assistance to be offered, will be on the G20 agenda. It is ironic that the countries sitting in judgment on Greece will include several who were former recipients of IMF medicine. It will be interesting to see how they jump, but much sympathy for Greece is unlikely.

The real problem is not so much Greece itself as the risk of contagion. Yesterday, short-term borrowing rates in Greece went into double digits. This is not sustainable, which is why Greece has finally requested assistance.

The real risk, as the IMF makes clear, is that others would follow. Here the focus is on Portugal and Spain.

Portugal has now replaced Ireland as the euro country with the second-highest borrowing costs. If the rot spreads to Spain, the game is up for the euro.

The IMF has never been hot on the euro. It has written several reports pointing out its flaws. It would be one for the books if the IMF and the G20 were to turn out to be its saviours.