Strauss-Kahn Says Greek Deficit a ‘Problem,’ No Euro Break-up

International Monetary Fund Managing Director Dominique Strauss-Kahn said the euro region will withstand the turmoil caused by Greece’s credit downgrade, a day after finance chiefs voiced concern debt woes are spreading.

“It’s a serious problem,” Strauss-Kahn said in an interview with Bloomberg Television in Hong Kong today, referring to the Greek fiscal situation. “But I don’t think that would lead to the fragmentation of the euro zone.”

Greece’s deteriorating finances prompted Fitch Ratings, Moody’s Investors Service and Standard & Poor’s to cut its sovereign ratings last month, spurring a sell-off in its bonds. The country faces pressure from other European Union governments to tackle the crisis caused by a budget deficit more than four times the EU limit of 3 percent of gross domestic product.

Policy makers gathering in Brussels yesterday called on Greece to take more action to contain the situation. Dutch Finance Chief Wouter Bos said the country’s plan to rein in spending “needs to be more substantial.” Luxembourg’s Jean- Claude Juncker said “we’ll have to see whether they’re enough.”

“The fate of one is the fate of all,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said at a press conference yesterday after the meeting of EU finance ministers. “This situation in Greece is having effects on other countries.”

Strauss-Kahn earlier reiterated the IMF’s view that China’s yuan is undervalued and should trade more freely. Premier Wen Jiabao has rebuffed calls from U.S. and European officials to allow the currency to be more flexible.

China’s Policy

“As the role of China in the global economy becomes bigger, it’s fair to expect the Chinese currency to play a bigger part,” Strauss-Kahn said after giving a speech at the Asian Financial Forum in Hong Kong. The yuan’s value “has to be determined by the market” before it can be considered an international reserve currency, the IMF chief said.

China has kept the yuan around 6.83 per dollar since July 2008 to help its exporters amid the global recession.

The euro, which is shared by 16 EU nations, has dropped 6 percent since Nov. 25 in part on investor concern other European countries may also struggle to contain their budget deficits.

German Chancellor Angela Merkel said Jan. 13 that Greece’s mounting deficit risks hurting the euro, which faces a “very difficult phase” in the coming years, according to comments posted on a government Web site and later removed. She backtracked two days later, praising the Greek government’s “Herculean effort” to tame the budget deficit.

The Greek government’s latest proposals call for about 10 billion euros ($14.4 billion) of spending cuts and revenue increases this year to cut the deficit from 12.7 percent of GDP to 8.7 percent by year-end.

Strauss-Kahn reiterated that countries around the world shouldn’t unwind their stimulus measures abruptly because that could push their economies back into a recession.

“If we remove stimulus too early, there’s risk to a double-dip” slump, Strauss-Kahn said in the interview scheduled to air on Bloomberg Television later today.