Europe Urged to Fix Crisis as G-20 Warns of More Stress
Europe’s governments were told the onus for fixing their debt woes lies with them as the Group of 20 warned the two-year crisis still threatens global growth.
With finance chiefs from the G-20 meeting today in Washington, those from Canada and Australia joined the IMF and U.S. in pressing Europe to intensify efforts to quell the turmoil as it spreads to Spain. The G-20 cited “the situation in Europe” first in a list of drags on the world economy, according to a draft statement obtained by Bloomberg News.
As she closed in on her goal of bolstering the IMF’s crisis-fighting coffers by more than $400 billion, Managing Director Christine Lagarde said the lender serves as an emergency backstop and that Europe must protect itself, boost economic growth and cut debt. Italian and Spanish bonds fell today as the G-20 noted “stress has increased as of late.”
“Countries have to take measures,” Lagarde told Bloomberg Television’s “InBusiness With Margaret Brennan” in Washington. “I am in charge of improving the stability and I need to have the umbrella in case the clouds break into a nasty rain.”
Lagarde is looking to increase a lending capacity of about $380 billion and has so far raised more than $320 billion with Russia becoming the latest nation to chip in $10 billion. The lending amount will be lower than the total amount raised because the IMF must keep some cash on hand.
The lender wants the money to help insulate the international economy from dangers such as European contagion, high unemployment and rising oil prices.
The G-20 identified similar risks in its draft statement which may be revised when finance ministers and central bankers meet today at the IMF’s headquarters in Washington from 9:45 a.m. It said recent signs suggested “continuation of a modest global recovery” and that “tail risks” had started to recede.
“However, growth expectations for 2012 remain moderate,” the draft said. “As significant downside risks still persist, we remain committed to further reduce these risks.”
While South Korean Finance Minister Bahk Jae Wan said Lagarde may ultimately secure as much as $450 billion, some emerging markets including Brazil are resisting making immediate commitments as they demand more power for themselves at the IMF. The G-20 draft statement said a paragraph on IMF resources would be added later.
“I can assure you that the G-20 will announce the final amount” today, Russian Deputy Finance Minister Sergei Storchak told reporters in Washington late yesterday. “This will be the sum that will suit the leadership of the International Monetary Fund.”
Euro-area policy makers are counting on a beefed-up IMF to placate investors who have propelled yields on Spain’s 10-year bonds toward levels which trigged bailouts for Greece, Ireland and Portugal. They already agreed last month to boost their own defenses to 800 billion euros ($1 trillion.)
That still falls short, said Canadian Finance Minister Jim Flaherty, who like U.S. Treasury Secretary Timothy F. Geithner has declined to give more money to the IMF on the basis it has enough and Europe should do more. He proposed non-European countries be handed a veto over the role the lender can play assisting Europe.
“They need to build up a firewall with their own resources more than they have done so far,” Flaherty said in an interview.
Australian Treasurer Wayne Swan echoed that message, saying in a statement that “important reforms are still needed to minimize the risk of contagion from instability in Europe.”
European officials defended their actions as they arrived in the U.S. capital.
“The Europeans have done their part,” European Central Bank Executive Board member Joerg Asmussen said. “Now it’s up to our partners and this includes Canada and many other countries to increase the IMF resources.”
Some emerging markets are holding back with Brazilian Finance Minister Guido Mantega saying there is a complementary need to strengthen the IMF. The U.S. is among nations still to ratify a 2010 decision that would hand more voting power to developing economies. China is willing to discuss more funding, Foreign Ministry spokesman Liu Weimin said in Beijing yesterday.
“We are not ready to talk about specific numbers, given there are still conditions that need to be met,” Mantega said. Some countries “are more enthusiastic about asking money from emerging markets than carrying out the quota reform, because these are the countries that will lose.”
A day after the IMF said European banks could be forced to sell as much as $3.8 trillion through next year, Lagarde said European governments should consider using their rescue funds to inject cash directly into Spanish banks. Other advice the IMF has given this week included for the ECB to cut interest rates again, for governments to issue joint debt and for banks to be restructured.
Europe has repeatedly failed to heed international lobbying to get ahead of its crisis. It underestimated the threat posed by Greece’s budget woes when they came to light in-late 2009 and then the amount of cash required to contain the pain.
Officials last month balked at a proposal to lift their firewall closer to 1 trillion euros and Spain’s benchmark yield has jumped about 1 percentage point since early-March as Prime Minister Mariano Rajoy struggles to meet budget deficit targets.
“The Europeans do respond at the last minute in a desperate way that has not yet provided a more systematic solution,” said Simon Johnson, a former IMF chief economist who now teaches at Massachusetts Institute of Technology in Cambridge, Massachussetts. “Perhaps there will be continued pressure in Spain or the focus shifts to Italy.”
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