Euro Crisis Shifts to Spain as Merkel Faces G-20 Pressure
Emerging countries boosted their pledges to the IMF’s global firewall, nearly doubling the fund’s resources to $456 billion, at a G-20 summit in Mexico dominated by the global effort to restore confidence in the euro.
President Barack Obama and German Chancellor Angela Merkel, facing pressure from the U.S. and fellow European leaders to do more to stem the crisis, met before the summit after trading accusations in recent weeks over responsibility for the turmoil.
“The president was encouraged by what he heard regarding ongoing discussions in Europe about the paths they are pursuing to address the crisis,” White House spokesman Jay Carney told reporters during the summit in Los Cabos yesterday.
An after-dinner meeting of Obama and the leaders of the four participating euro-area countries -- Germany, France, Italy and Spain -- was canceled after summit participants agreed that they had spent enough time on the crisis, an official from a G-20 nation familiar with discussions said.
China, Brazil, Mexico, India and Russia announced contributions to the IMF to bolster a “second line of defense,” fund Managing Director Christine Lagarde said in an e-mailed statement. China will contribute $43 billion, the official Xinhua News Agency reported. The others’ share was $10 billion each.
“There is concern that the firewall available may not be adequate to deal with contagion,” Indian Prime Minister Manmohan Singh said at the summit. “The resources currently expected to be mobilized by Europe and the IMF are less than was estimated a year ago, and the crisis is actually more serious.”
G-20 chiefs met as Spain’s borrowing costs soared to a euro-era record and elections in Greece failed to damp the threat of contagion. While Merkel rejects pooling euro-area debt or boosting deficit spending, Obama has blamed the financial crisis in the world’s second-biggest economic bloc for slowing U.S. employment growth.
Europe is making an effort to “break the feedback loop” between banks and government debt, the link that is worsening Spain’s woes, the Treasury Department’s top international negotiator, Lael Brainard, told reporters.
“We’re seeing a notable shift in European discussion” toward spurring economic growth and “laying out a path to financial union,” she said.
The euro-area’s G-20 governments will commit to protecting the currency union, according to an excerpt of a draft of the statement that leaders will issue at the summit’s close.
Euro-area members of the G-20 “will take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks,” according to the draft provided by an official from a G-20 government who asked not to be identified because the statement is not yet public.
With European Union leaders preparing to discuss the path to closer political and economic union at a summit in Brussels on June 28-29, Merkel has distanced herself from proposals for a banking union. She said last week that steps such as jointly insuring deposits and joint euro-area bonds can’t replace budget discipline and increased competitiveness.
The euro extended declines yesterday as Spanish 10-year bond yields leapt above the 7 percent level that forced Greece, Ireland and Portugal to call for outside aid. That stoked speculation Spain may need to request a sovereign bailout after the government called for as much as 100 billion euros ($126 billion) to shore up its blighted banks.
G-20 leaders are in Los Cabos for their second consecutive summit to be dominated by the crisis. Spain’s Prime Minister Mariano Rajoy is also attending the talks, as the respite in markets after a victory for the pro-bailout New Democracy party in Greek elections on June 17 proved short-lived.
Merkel damped speculation that the terms of Greece’s bailout might be relaxed.
“The important thing is that the new government sticks with the commitments that have been made,” Merkel told reporters. “There can be no loosening on these reform steps.”
China and Indonesia set the tone of the meeting by signaling growing exasperation with more than two years of European crisis-fighting that has failed to stem the threat of global contagion.
Even as Obama said that now is the time “to make sure that all of us do what’s necessary to stabilize the world financial system,” European leaders pushed back, saying they alone are not responsible for the slowing global recovery.
No one thinks the EU “is the only source of the problem,” said Italian Prime Minister Mario Monti. The crisis “had its origins in imbalances in other countries, including the U.S.”
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