Euro-area finance ministers said they would seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding the effort to expand their bailout fund missed its target.
The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.
“It’s clear that we can go further through the IMF and probably action by the European Central Bank,” Belgian Finance Minister Didier Reynders said today as ministers gathered for a second day of talks. “For the IMF, we are working to see how to reinforce its action and possibly contribute to a boost in its resources. As for the central bank, it’s for the central bank to make its decisions.”
After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, Europe is under growing pressure from U.S. leaders and international financial markets to find ways to boost the EFSF’s effectiveness. The finance chiefs agreed on a plan yesterday to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.
European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules. The move might make it easier for the ECB to play a bigger part in supporting euro-area nations, possibly channeling loans through the IMF, two officials familiar with the matter said yesterday.
“Should they fail to deliver a credible framework encompassing both these dimensions, we would expect that the ongoing ‘run’ on governments and banks will accelerate, and it is seriously to be feared that it can no longer be stopped,” Arnaud Mares, a Morgan Stanley analyst, wrote in a research note yesterday. “The economic, social and political consequences could be unfathomable. The next few weeks are therefore a critical moment in European history.”
While leaders previously said leveraging would expand the 440 billion-euro ($584 billion) EFSF’s reach to 1 trillion euros, Chief Executive Officer Klaus Regling said it is “impossible to give one number” for the fund’s power.
Juncker said the EFSF’s capacity will be “very substantial” though less that 1 trillion euros, and will be supplemented by the IMF. The ministers “agreed to rapidly explore an increase of the resources of the IMF through bilateral loans,” Juncker said, “so that the IMF could adequately match the new firepower of the EFSF and cooperate more closely with it.”
European Union Economic and Monetary Affairs Commissioner Olli Rehn said the issue “needs to be discussed with the IMF and this work is in progress.” Neither Rehn nor Juncker named who might provide the loans.
With about $390 billion currently available for lending, the Washington-based IMF may not have enough money to meet demand if the global outlook worsens, managing director Christine Lagarde has said. The IMF is co-funding the bailouts of Greece, Ireland and Portugal and is preparing to send a team to Italy for an unprecedented audit of that country’s efforts to cut its debt.
“It’s very important that the IMF globally will increase its resources either by raising its capital or by bilateral loans so that it can lend more money to euro-zone countries in need,” Dutch Finance Minister Jan Kees de Jager said in an interview with Bloomberg Television last night. “If we open the IMF effort, that will be sufficient together with the leverage options in the EFSF.”
Boosting the IMF’s resources may not be so simple, said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration. “It will be very difficult if not impossible for the U.S. to contribute fresh resources to the IMF,” he said in an e-mailed comment.
ECB Executive Board Member Juergen Stark, speaking to reporters in Dallas yesterday, warned that the Frankfurt-based central bank cannot lend to the IMF because it is not a member.
Lagarde, a former French finance minister, said this week in Lima, Peru, that Europe needs “a comprehensive, rapid set of proposals that would form part of a comprehensive solution, and the IMF can be a party to that.”
Austrian Finance Minister Maria Fekter today expressed some flexibility on the ECB stepping up purchases of Italian and Spanish government bonds to reduce their yields.
“There is a discussion on how the ECB can be better enabled to buy bonds,” said Fekter, whose country along with Germany has been one of the main opponents of a greater role for the ECB. “The ECB has a very strong role already. Since we need an instrument that can act flexibly with regard to the refinancing of banks and states, I can imagine an evolution.”
The euro-region finance ministers last night approved a 5.8 billion-euro loan to Greece under last year’s bailout after eliciting budget-austerity pledges from Greek political leaders backing a unity government. The ministers agreed to appoint France’s Benoit Coeure to a soon-to-be empty spot on the ECB’s board and presented new Italian Prime Minister Mario Monti with a report outlining measures the country should take to reduce debt and boost economic growth.
Today’s meeting, which will include all 27 EU finance ministers, will seek agreement on how to temporarily guarantee banks’ bond issuance in order to improve funding conditions for lending. EU leaders agreed last month to provide the guarantees as part of a set of measures to restore investor confidence in banks.