IIF’s Dallara optimistic about Greece’s future despite political instability

Charles Dallara, managing director of the Institute of International Finance, said that he is optimistic about Greece’s long-term prospects, but estimates that the next few months will be a crucial test for the debt-wracked country, following a general election on May 6 that failed to form a government.

“I am watching the developments in Greece carefully, but we need to allow the process to play out somewhat here. It will take some time to get results here, but when the dust settles we will have a government that comes together that has little choice but to preserve in many aspects the economic reform program,» Dallara told CNBC’s «Squawk Box Europe.”

Dallara, who supervised the massive writedown of Greek debt by private sector bondholders and has followed developments in the recession-hit country, said «If we can get private investors? confidence rebuilt, we can change the situation around in Greece. The focus has been too heavily placed in short-term budget cuts and this has created the feeling that the situation seems bottomless,? Dallara said, referring to a painful austerity program Greece has agreed to in exchange for bailout funds from the European Commission, the European Central Bank and the International Monetary Fund.

The head of the IIF also said that the European recovery program, spearheaded by Germany, has put too much emphasis on austerity and not enough on growth, suffocating economies like that of Greece.

?We?ve seen the European economy within the political framework has disconnected. The overall focus on short-term budget cuts has to be adapted with economic reality,» Dallara said.

Greece is being closely watched by jittery markets after the leading conservative party failed to form a government on Monday, with the mandate now in the hands of Coalition of the Radical Left (SYRIZA), a leftist grouping that shot up in the polls as a champion of scrapping the memorandum signed between the previous unity government, headed by technocrat Lucas Papademos, and Greece’s creditors, containing the terms of the bailout deal

Recapitalizing the country’s banks would be a good way to kick-start the economy and restore some market confidence, Dallara told CNBC.

?There needs to be an urgent recapitalization of banks in Greece and I would encourage all authorities to move (…) to recapitalize the Greek banks to get credit flowing into that economy which is remarkably credit starved,? he said.

?Some regulatory reform could be put on hold for a period of time so pressure to rebalance levels of capital can be eased and the credit activity can start growing again. You are not going to have renewed growth as long as you have contractions of credit,» Dallara added.