Economics, EU – Baltic States, Financial Services

Struggling countries in the region, hit hard by the global financial crisis, should join the eurozone as "quasi-members" without seats on the governing council of the European Central Bank, according to the report obtained by the Financial Times.

"For countries in the EU, 'euroisation' offers the largest benefits in terms of resolving the foreign currency debt overhang (accumulation), removing uncertainty and restoring confidence," the IMF report said.

"Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance," it added.

However, the FT also said Monday that such an initiative could encounter serious problems because of opposition from eurozone members and the ECB, which oppose easing euro entry rules, informs LETA.

The report was compiled one month ago to support a campaign by the IMF, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European countries to back an anti-crisis strategy that would include a regional rescue fund.

The euro, launched in 1999, is the shared currency of 16 member states which comprise the eurozone, home to more than 325 million people. In addition, both Kosovo and Montenegro have unilaterally chosen to adopt the euro although neither country formally belongs to the eurozone.

Analysts meanwhile poured cold water on the FT report. "The likelihood of this succeeding seems low to us," said David Woo at Barclays Capital.

"This was purportedly recommended by the IMF a month ago and there have been no signs of positive receptions from the ECB/European Commission/eurozone leaders on this. Moreover, there is risk that central and eastern countries will be reluctant to aim for what may be considered a 'second class' eurozone membership unless they are the point of major stress, in which case it could be too late anyway," Woo said.

"We see the report as signaling an IMF preference for foreign exchange stability in the region, which further lowers the tail risk in currencies in the region," he added.

Central and eastern Europe is currently buckling under the weight of the global economic downturn. In recent weeks, Romania, Hungary, Latvia, Serbia and Ukraine are among countries to have sought emergency IMF funds due to the global recession.

Group of 20 leaders agreed at a key London summit last week to combat the burgeoning crisis with a trillion-dollar funding boost for the IMF and World Bank.