European finance ministers said they would seek a greater role for the International Monetary Fund alongside their own bailout fund in their latest gamble at taming the euro zone’s sovereign debt crisis.
Ministers turned to the IMF after conceding that higher interest rates and lower appetite for European bonds made it impossible for the European Financial Stability Facility to be leveraged up to its 1 trillion euro ($1.3 trillion) target. Meeting in Brussels, the ministers also suggested that any IMF help or increase in bond purchases by the EFSF, and possibly by the ECB, depends on a Dec. 9 summit of heads of government accepting German demands for governance changes that would tighten enforcement of budget rules.
“The feasibility of interventions by both bodies depends on making progress on institutional matters such as moving toward fiscal union,” new Italian Prime Minister Mario Monti said after the meeting. “The euro summit of next week will be fundamental because further progress has to achieved on the governance of the euro zone.”
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 EFSF, Luxembourg’s Jean-Claude Juncker said yesterday. Today, speaking to RTL Luxembourg radio, he said 750 billion euros was a more likely target.
‘Very, Very Credible’
“If we could see the proposed combination of IMF and ECB action, obviously that would be very, very credible to the market,” Swedish Finance Minister Anders Borg said today.
Finnish Finance Minister Jutta Urpilainen said in an interview that “if there’s nothing else left on the table” and the crisis continues, “then I’m ready to think about strengthening the role of the ECB, but as I already mentioned earlier, I prefer strengthening the role of the IMF.”
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.
The combination will guarantee that all euro region members will meet their financing needs going into next year, German Finance Minister Wolfgang Schaeuble said. “We know what the refinancing needs are,” he said. “The placement of bonds in the primary market has to be assured, but that’s something we can manage by means of the instruments of the EFSF and in cooperation with the IMF, and well beyond the first quarter.”
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.
“We’re ready in general to increase the IMF’s funds by means of bilateral loans,” Schaeuble told reporters. “If the IMF, to widen its leeway to act, wants to increase its Special Drawing Rights, then that’s something we’re ready to talk about.”
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.
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.”
Italy’s Monti, who also holds the finance ministry portfolio in his government, said the Dec. 9 summit will be “fundamental” for calming financial turmoil which has driven Italian to Spanish bond yields to euro-era record highs, threatened France’s top debt rating, and even resulted in the German government having trouble placing its debt.
‘Optimum Currency Area’
“Dec. 9 will be an important step towards the construction of an optimum currency area,” French Finance Minister Francois Baroin said. “For that, we need more surveillance, more budgetary consolidation, as well as fiscal and economic convergence and regional solidarity.”
The issue of the ECB stepping up its purchases of Spanish and Italian debt to bring down their borrowing costs was discussed “at the margins” of today’s meeting, said Ireland’s Finance Minister Michael Noonan.
Austrian Finance Minister Maria Fekter today expressed some flexibility on her previous opposition to ECB buying.
“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.”
Monti denied that Italy has made any approach for help to the IMF. He said his partners responded positively to his plans for cutting pension spending, loosening labor laws, and raising some taxes. The package will be presented Dec. 5.
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 also agreed to appoint France’s Benoit Coeure to a soon-to-be empty spot on the ECB’s board.