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G-20 Rebuffs Europe Aid Calls With Bigger Firewall Needed

IMF Managing Director Christine Lagarde
Christine Lagarde, managing director of the International Monetary Fund, said she wants to raise the Washington-based fund’s lending capacity by $500 billion to fend off “further shocks” to the global economy. Photographer: Susana Gonzalez/Bloomberg

Germany was left to dig deeper to combat the euro-area debt crisis after the Group of 20 nations told Europe to come up with more financial firepower before they consider lending outside support.

The decision by G-20 officials to rebuff European calls for assistance in their crisis-fighting effort pending an increase in its own financial backstop puts the onus on Germany, already the biggest national contributor to bailouts, to overcome its resistance to doing more.

With a parliamentary vote on a second Greek aid package looming in Berlin today, Chancellor Angela Merkel’s government must now decide whether to back plans at a March 1-2 European Union summit to combine rescue funds and produce a potential firewall of 750 billion euros ($1 trillion).

Europe “doesn’t really need any outside money,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an e-mail. “It needs their own policy makers, especially Germany, to show leadership.”

Germany went in to the Mexico meetings of finance ministers and central bankers urging G-20 nations to find fresh money for the International Monetary Fund that could be channeled to defuse the euro-region crisis now in its third year. IMF chief Christine Lagarde, who attended the talks, said she wants to raise the Washington-based fund’s lending capacity by $500 billion to fend off “further shocks” to the global economy.

‘Essential’ Review

The G-20 concluded that a European review of its financial firewall in March is “essential” before any consideration can be made to boost resources for the IMF, the G-20 said in its closing statement issued in Mexico City yesterday. Progress will be assessed in April, when officials gather in Washington for the IMF’s spring meetings.

“Until we see the color of their money, I don’t think you are going to see any money from the rest of the world,” U.K. Chancellor of the Exchequer George Osborne said in an interview in Mexico City.

The U.S. led calls for Europe to step up, with Treasury Secretary Timothy F. Geithner saying in a Feb. 25 speech in Mexico that the region needed to make their crisis-fighting commitments “credible.” The same day, German Finance Minister Wolfgang Schaeuble said a deal struck last week for Greece’s 130 billion-euro bailout showed “Europe has done its homework.”

The exchange underscored G-20 divisions as Japan, Brazil, Russia and the U.K. joined with the U.S. and Canada in prodding the euro-area to boost its crisis defenses. The deliberations left no time for discussion of a successor to World Bank chief Robert Zoellick, who steps down on Jun 30.

Greek-Aid Vote

While the German government has yet to show its hand on a plan to combine the 250 billion euros remaining in the region’s temporary fund and the 500 billion-euro permanent rescue fund that is due to come into force in July, Merkel has signaled she is open to review the matter at the EU summit in Brussels.

As with Germany’s stance on the crisis since it first came to light in Greece in late 2009, Merkel must take into account domestic considerations. Sixty-two percent of German voters said they want lawmakers to reject aid for Greece in today’s vote, an Emnid poll of 500 people for Bild am Sonntag newspaper showed yesterday. Thirty-two percent said they backed the bailout.

EU Economic and Monetary Commissioner Olli Rehn, asked in Mexico if he expected a deal on the firewall at this week’s summit, said he anticipated a result “in the course of March.” Italy’s central banker, Ignazio Visco, echoed those sentiments.

“The Germans have their own sequencing” and “want Greece out of the way” before debating the firewall, Jacques Cailloux of Royal Bank of Scotland Group Plc., said by phone. “Any hope there could have been for an agreement on a higher firewall as early as this week’s summit is fading.”

ECB Action

Even so, the G-20’s stance on additional funds is not as big a focus for investors as Greece and the European Central Bank’s decision to offer banks unlimited liquidity for three years, the second such offering in three months, Cailloux said.

Pressure for a deal in Mexico eased after European bond markets reacted positively to last week’s agreement to help Greece avert the euro-area’s first sovereign default.

Italy’s 10-year bonds rose for a seventh week, the longest run of gains in the euro-era, while Spanish 10-year bonds had their biggest weekly advance in a month.

Europe’s Stoxx 600 index still slipped 0.4 percent last week on concern that Greece won’t be able to implement the austerity measures needed for the rescue, and as the European Commission said the euro area’s economy will shrink this year. Commerzbank AG, Germany’s second-biggest lender, tumbled 6.6 percent on Feb. 23 as it and two other banks, Royal Bank of Scotland Group Plc and France’s Credit Agricole SA, booked losses on their Greek government debt.

Reassuring Investors

“In order to reassure market investors that contagion is under control, more firepower is needed,” Andrew Milligan, who helps oversee about $262 billion as the Edinburgh-based head of global strategy at Standard Life Investments Ltd., said in an e-mail. “Pressure is certainly growing on Germany and others to increase the firewall. I think eventually they will agree, although it may take another crisis or a difficult period of negotiation before that happens.”

The G-20 statement said that growth expectations for 2012 are moderate and downside risks continue to be high along with market volatility. With oil prices undergoing the longest rally in two years amid tension with Iran and Syria, G-20 countries said in their statement they “welcome the commitment by producing countries to continue to ensure adequate supply.”

No Complacency

While the meeting recognized the “significant progress” made this year in Europe and the U.S. in stemming risks, “this is not the moment for complacency,” Mexico’s Central Bank Governor Agustin Carstens told reporters.

Euro-area governments have pledged about $200 billion in new money to the IMF’s lending resources. Geithner said in Mexico that he won’t go to Congress to seek a U.S. contribution because “we don’t think that’s necessary or desirable.”

Brazil’s Finance Minister Guido Mantega said after meeting with his counterparts from Russia, India, China and South Africa that the BRICS group of major emerging markets will only add more funding for Europe if the region’s leaders follow “precisely to the letter” a 2010 agreement to give them a bigger say in how the IMF is run.

Canadian Finance Minister Jim Flaherty pointed the finger at Germany for being absent at the helm, saying that it was time for Europe’s dominant country to “take that leadership role very seriously and come up with an overall euro-zone plan.”

While the government in Berlin faced criticism, the Frankfurt-based ECB was singled out for praise by both Geithner and Lagarde, with the IMF chief saying the central bank’s actions helped avert “derailment” of the global recovery.

“Given some of the official narrative in the run-up to the meeting, few expected it to yield much in terms of concrete agreements,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an e-mail. Still, “it would be unwise for markets and policymakers to think that ECB liquidity injections, while powerful, would durably substitute for proper actions to improve growth, competitiveness and debt solvency.”

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