European central banks may channel 150 billion euros ($200 billion) through the International Monetary Fund to fight the debt crisis in exchange for fresh pledges of fiscal probity from European governments at a last-ditch summit, a European Union diplomat said.
Plans to recycle central bank funds through the IMF started to fall into place as French President Nicolas Sarkozy warned “there’ll be no second chance” for Europe in the absence of a credible crisis-containment strategy at a summit that starts this evening in Brussels.
Marching in lockstep with German Chancellor Angela Merkel, Sarkozy today pressed for ironclad barriers against excessive deficits and debt in an overhaul that plugs holes in the economic-management system that failed to prevent Greece, Ireland and Portugal from skidding toward financial ruin.
“We need more solidarity in the euro zone and more discipline,” Sarkozy said at a pre-summit meeting of conservative leaders in Marseille. Europe is in an “extraordinarily dangerous situation.”
European leaders are navigating a labyrinth of political and economic constraints amid unrelenting pressure from financial markets in an effort to craft a fifth “comprehensive” package to stamp out the crisis that began with the Greek government discovering an unexpected budget hole in October 2009.
‘Artillery and Air Force’
The European Central Bank provided breathing space today, trimming its main interest rate by a quarter-point to 1 percent and pledging to offer commercial banks unlimited cash for three years to tide them through the crisis.
Europe’s banks will need to raise 114.7 billion euros in fresh capital as part of measures introduced in response to the debt crisis, the European Banking Authority said today. German banks need 13.1 billion euros and Italian banks 15.4 billion euros in core tier 1 capital. European lenders will have to raise a total of 8 billion euros more than previously estimated by the EBA in October.
“After a series of ‘final’ summits, it would be nice this time to have a real ‘final’ summit,” Jean-Michel Six, Standard & Poor’s chief European economist, told reporters in Paris today. The ECB “is the only one with the firepower” needed. “It’s the only one with artillery and an air force.”
ECB Bond Purchases
Still, ECB President Mario Draghi signaled no intention to expand the bank’s 207 billion-euro bond-purchasing program and said it would be “complex” to engineer a way for national central banks to recycle funds through the IMF.
“One cannot channel money in a way to circumvent the treaty provisions,” Draghi told a Frankfurt press conference. “If the IMF were to use this money exclusively to buy bonds in the euro area, we think it’s not compatible with the treaty.”
The euro fell after Draghi’s comments, trading at $1.3304 at 5:09 p.m. in Brussels, down 0.8 percent on the day.
Germany, Europe’s dominant economy, hasn’t taken a public stance on the proposal to funnel central bank money through the IMF, which would include as much as 50 billion euros from non-euro EU countries. Merkel has insisted that the rest of Europe first bow to tighter rules on budget deficits in order to reassure central bankers about the euro region’s longer-term economic health.
EU leaders meet for a working dinner at 7:30 p.m. in Brussels, their mission complicated by Standard and Poor’s decision to issue a downgrade warning for 15 euro-area governments pending the summit outcome.
Merkel and Sarkozy are pushing for EU treaty amendments that would anchor balanced-budget rules in national constitutions, stiffen penalties on fiscal sinners and enable unprecedented intervention by European authorities in budget-setting by countries that fall afoul of the rules.
U.S. Treasury Secretary Timothy F. Geithner, on the final leg of a three-day trip to Europe, has urged policy makers to work with central banks to erect a “stronger firewall.”
“The leaders of Europe are moving this week to strengthen the foundations of monetary union,” Geithner said after talks with Italian Prime Minister Mario Monti in Milan. “These are vital and critical but also very challenging reforms. And they will take time.”
In a joint letter to European leaders yesterday, Merkel and Sarkozy set a March 2012 deadline for an agreement on EU treaty amendments, calling on euro states to go it alone in the absence of an accord among all 27 EU governments.
Permanent Rescue Fund
That appeal plus a call for a financial transaction tax set up a showdown with U.K. Prime Minister David Cameron, head of the biggest EU country still using its own currency. Cameron comes to Brussels vowing to defend London’s status as Europe’s premier financial market.
A consensus is emerging to speed the setup of a permanent rescue fund, the 500 billion-euro European Stability Mechanism. It is likely to go into operation in late 2012, instead of mid-2013 as originally planned, the EU diplomat said.
In a concession by Germany, the revamped permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel agreed in yesterday’s letter that the two writedowns imposed on Greek bondholders this year were “unique and exceptional.”
National sensitivities pervade the negotiations, such as Finland’s objection to scrapping the unanimity rule for decisions by the fund to grant aid
“The world is watching Europe,” European Commission President Jose Barroso said in Marseille. “What I expect from all heads of state and government is that they don’t come saying what they cannot do, but what they will do for Europe. What the world expects from us is not more national problems, but European solutions.”