German sources said on 9 February that European governments had agreed in principle to help Greece in what would be the first rescue of a eurozone member in the currency's 11-year history. The informal EU summit to be held tomorrow (11 February) is expected to address the issue.
But IMF insiders and analysts say that may not be enough to prevent investor concerns from spreading to other European countries.
Europe is still loathe to turn to the IMF for fear of stigma. But at the very least it could use the expertise of an agency that has handled countless debt crises and is already providing technical assistance to Greece.
Turning to the IMF would for many leaders amounts to "capitulation to Washington, a total political abdication," said Paul de Grauwe, economics professor at Belgium's Catholic University of Leuven.
But deeper IMF involvement would provide some reassurance to skittish investors who are casting a wary eye toward other fiscally fragile countries such as Spain and Portugal that are also shouldering heavy debt burdens. The cost of insuring those countries' debt against default has soared in recent days.
If the debt situation proves more dire than initially thought, Europe may need the IMF's financial firepower.
"There is a high probability the IMF will need to step in to prevent contagion," an IMF board source told Reuters, before adding that Europe had made it clear it wanted to deal with the issue.
Greece's debt woes have raised pressure on the rest of Europe's currency zone to prove it can force Athens to take the painful measures required to clean up its public finances.
European policymakers and the IMF agree that Greece is unlikely to default, although the Greeks need to lay out a convincing strategy to regain control of expenditures and demonstrate they can stick to the plan.
European officials have also been adamant that they want to handle matters themselves.
"What's clear is that this is a matter for the Europeans," German Finance Minister Wolfgang Schaeuble told German media this week. "There is no doubt that Greece is not a question for the International Monetary Fund."
But there are concerns outside the euro zone that Greece's woes have already harmed the prospects of enlarging the group, dealing a blow to Baltic states' ambitions of adotping the single currency.
Swedish Finance Minister Ander Borg said on Tuesday a discussion on a role for the IMF in dealing with the situation should not be "taboo".
Nordic countries contributed 1.8 billion euros toward an IMF-led bailout package in Latvia.
"Financial markets have signaled very clearly their discomfort with the situation unravelling in Greece and there is a risk of contagion to other countries," said Domenico Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution.
"It is really a political decision and not a decision that the ECB [European Central Bank] can take the lead because there is no bailout clause in the ECB charter," Lombardi said. "This leaves a role for the IMF."
Lombardi, who is a former member of the IMF board, believes that getting the Fund involved would ease pressures from financial markets.
He said while the IMF could provide Greece with financial support through a precautionary arrangement, he acknowledged it would be politically easier for the IMF to monitor whether Greece honors its commitments on fiscal reforms through some form of "enhanced surveillance".
Such an IMF "seal of approval" would help to reassure markets, Lombardi added.
"The EU doesn't have a structure and a set of people who can do what the IMF does. And the IMF, for all its faults, is quite good at getting agreements and then getting people to stick to agreements," said Simon Johnson, former IMF chief economist.
How much money?
Publicly, the IMF's press line on Greece is that if asked by the European Union, the IMF will be willing to help Athens.
IMF chief Dominique Strauss-Kahn said last week that the fund was ready to step in, if needed.
That said, the former French finance minister is widely reported to be eyeing the French presidential election in 2012, which would pit him against President Nicolas Sarkozy, and riding to Europe's rescue would score political points.
Greece's borrowing capacity, as measured by its quota in the IMF, is only around $500 million, a drop in the bucket compared with the country's estimated shortfall this year of between $50 billion to $70 billion.
Meanwhile, reported estimates of a Greek bailout of between 23 billion to 25 billion euros are more based on the country's debt service coming due in May rather than on firm proposals by the IMF.
(EurActiv with Reuters.)
The Financial Times reported that German officials had conceded they were looking at ways to build a "firewall" in order to prevent the debt crisis in Athens from spreading across the euro zone.
According to the FT, Germany is increasingly worried that should the financial market pressure on Greece intensify, it could begin to hit German and other eurozone banks.
The FT quoted one German government official as saying that the recent steep decline in the euro and pressure on bond prices had convinced Germany to "take significant steps" to deal with the crisis. "We've had to face up to the fact that what is now a Greek problem could turn into a European one," the official was quoted as saying.
"We're thinking about what we should do if the crisis spills from Greece into other euro countries," he continued. "So it's more about finding firewalls, containing the problem, than principally about helping the Greeks."
The official added that there are "no concrete plans" to help Greece as yet.