The International Monetary Fund dropped the broadest of hints on Monday night that it would give Greece more time to implement its hardline cuts programme as it warned that Europe posed a "critical risk" to a weakening global economy.
Christine Lagarde, the Fund's managing director, said the Washington-based institution was "prepared to be flexible" and said both growth and austerity were needed to put an end to a crisis which will next month again force the IMF to cut its global growth forecasts.
The head of the IMF was speaking as financial markets responded nervously to Portugal's decision to dilute its deficit-reduction programme, the protracted talks over a new package of help for Greece, and mounting political pressure on the Spanish government over its package of cuts and tax increases.
Pedro Passos Coelho, Portugal's prime minister, said his government was abandoning plans to raise employee social security payments from 11% to 18% of their salary following widespread public protests. In Spain, Mariano Rajoy's government was facing one of its toughest weeks since it came to power last year as it sought approval for a new wave of reforms designed to pave the way for a European rescue.
Meanwhile, in Greece there was mounting suspicion among members of Antonis Samaras's government that the IMF has been deliberately blocking agreement on €11.9bn (£9.5bn) of spending cuts necessary for Greece to receive the next tranche of its bailout.
"Basically they want the measures to fail so that Greece is forced to ask for another haircut [on its debt] but we know that is not the view of the EU commission or Germany which is strongly against another debt restructuring at this time," said one Greek official in Athens.
Lagarde said that Europe's debt crisis and the projected sharp budget retrenchment in the US early next year posed critical risks, and said the Fund would show flexibility to countries in trouble.
"We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months", she said in a speech in Washington. The Fund had been expecting the global economy to grow by 3.5% this year and by 3.9% in 2013.
"A number of factors are weighing the global economy down. At the centre of them all is the element of uncertainty; uncertainty about whether policymakers can and will deliver on their promises."
The IMF managing director said the lasting scars from the crisis included youth unemployment in countries like Greece and Spain, high levels of public debt and a poorly functioning financial sector.
"Worryingly, the energy to implement the reforms that have been agreed –as well as the other reforms that we need – is waning. I am often asked, five years into the crisis, whether the financial sector is safer today than it was then. My answer? 'Despite real progress, not yet.'"
Lagarde said Europe remained the epicentre of the crisis, adding that programmes should be tailored to the needs of individual countries and backed by financial help.
"On the Fund's part, we are favourably considering that this be done in as timely and flexible a manner as possible: slowing the pace of fiscal adjustment where needed; focusing on measures rather than targets; and, above all, keeping the emphasis not just on austerity, but also on growth as we believe that the two can be reconciled and should not be mutually exclusive."
In Madrid, some 1,300 police were being drafted in to keep protesters away from the Congreso de los Diputados, the parliament building, as an "occupy parliament" movement called for a popular, indefinite blockade starting on Tuesday.
Metal fencing and several rings of security manned by police were being put in place to keep demonstrators away from the building, with authorities claiming a blockade would be a direct attack on Spanish democracy.
"We will not let parliament be surrounded or taken over," warned Cristina Cifuentes, the interior ministry's Madrid chief, who claimed extreme left-wing and right-wing groups were both involved.
It was unclear whether organisers, who define themselves on the internet as "democratic, anti-neoliberal, anti-capitalist and anti-patriarchal", would be able to mobilise a large number of demonstrators.
The protest coincides with the beginning of a debate in the Catalan regional parliament in Barcelona which threatens to see it demand that Rajoy's government formally recognise a right to self-determination for the wealthy north-eastern region.
Rajoy's government will this week approve a new reform programme and next year's budget, opening the way for it to request a bailout from eurozone countries. That would allow the European Central Bank to intervene in bond markets and drive down the country's exorbitant borrowing costs.
Several of Spain's most important indignado protest groups have refused to back Tuesday's attempted peaceful blockade of the Congreso de los Diputados organised by the "On Your Feet!" group, which says it does not intend to stop deputies going to work.
guardian.co.uk © Guardian News and Media Limited 2010
image: © Marie-Lan Nguyen
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