A European proposal to channel central bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said.
At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go-ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.
Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said.
“We’re looking for a maximum reinforcement with the IMF and the central bank,” Belgian Finance Minister Didier Reynders told reporters Nov. 30.
No fewer than four “comprehensive” rescue packages over 19 months have failed to arrest the crisis, fueling speculation that a currency designed to last forever might break up unless European leaders forge a more united economy. Central bank loans may be linked to an adoption of tougher budget policing by governments and tighter economic ties.
The euro area’s 17 national central banks operate under the ECB’s umbrella. Draghi yesterday hinted at a stepped-up crisis-fighting role as long as governments move toward a “fiscal compact” that ensures healthy public finances.
German Chancellor Angela Merkel laid out elements of that strategy today, calling for European treaty amendments to create automatic, court-enforced sanctions on countries that overstep limits of 3 percent of gross domestic product on deficits and 60 percent of GDP on debt.
For governments in rich countries such as Germany that are unwilling to lend more to high-debt states, the IMF idea would unlock funds without violating European rules that bar central banks from offering direct budget financing, the people said.
Spokesman for the ECB and Bundesbank declined to comment.
“The IMF will need more resources should the crisis deepen further,” Gerry Rice, a spokesman for the IMF, said in a statement today. “Such loans could indeed come from member country central banks, and indeed these central banks are already lending to the fund under the New Arrangements to Borrow and bilateral agreements signed since 2009.”
“It is an easy solution because bilateral loans coming from the central banks, they haven’t to ask for money from the taxpayer,” European Union President Herman Van Rompuy said in Brussels yesterday. “But we are exploring these avenues. It depends also on the amount of money we can raise.”
News of the possible IMF lending channel boosted the shared currency. The euro rose as much as 0.7 percent before erasing the gain on a disappointing U.S. jobs report. It slid 0.2 percent to $1.3431 at 11:00 a.m. in New York, paring its advance for the week to 1.4 percent.
“For the first time during the protracted euro crisis, a number of factors have emerged that provide hope that Europe may still come out of it, if not unscathed, at least alive,” said Alessandro Leipold, a former acting director of the IMF’s European department who is now chief economist of the Brussels-based Lisbon Council. “The moment is fleeting and it will have to be seized decisively.”
Bonds of Italy and Spain rose today amid optimism that European leaders will piece together a tighter fiscal framework at a Dec. 8-9 summit that would prompt the greater central bank commitment.
One option is the lending via the IMF, which specializes in aid programs and has about $390 billion available to lend. The sums being discussed by finance officials range from 100 billion to 200 billion euros, the people said. Bilateral loans through the Washington-based lender would also spare the euro-area central banks from conflicts of interest that could arise from enforcing conditions on countries where they also set interest rates, the people said.
The U.S. has no plans to make bilateral loans to the IMF to help stem the European debt crisis, a Treasury Department official said.
The IMF has ample resources, said the official, who declined to be identified as a condition for holding the briefing with reporters in Washington today.
“If we could see the proposed combination of IMF and ECB action, obviously that would be very, very credible to the market,” Finance Minister Anders Borg of Sweden, a non-euro member, said Nov. 30.
Two broad channels are under consideration, the people said. Under the first option, the European money would go into an IMF trust fund earmarked for troubled euro states. Under the second, the loans would be plowed into the IMF’s general resources.
Such a program wouldn’t be a substitute for the increase in ECB bond purchasing that countries such as Spain have clamored for. The central bank has bought 203.5 billion euros of bonds of three countries receiving financial aid -- Greece, Ireland and Portugal -- plus Italy and Spain since May 2010.
“Now is the time to act decisively,” George Papaconstantinou, Greek finance minister during the first year of the crisis and now energy minister, told Bloomberg Television’s Francine Lacqua in an interview to air next week. “At the same time we’re moving in the right direction, we’re not moving fast enough. We’ve been behind the curve, we’re always taking half-measures, one step behind the market.”