Euro zone IMF loan target in danger as UK declines help

BRUSSELS/LONDON Mon Dec 19, 2011 6:37pm EST

A euro sculpture is pictured in front of the headquarter of the European Central Bank (ECB) in Frankfurt, January 15, 2009.   REUTERS/Kai Pfaffenbach

A euro sculpture is pictured in front of the headquarter of the European Central Bank (ECB) in Frankfurt, January 15, 2009.

Credit: Reuters/Kai Pfaffenbach

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BRUSSELS/LONDON (Reuters) - Euro zone ministers agreed on Monday to boost IMF resources by 150 billion euros to ward off the debt crisis and won support for more money from EU allies, but it was unclear if the bloc would reach its 200 billion euro target after Britain bowed out.

Following a three-hour conference call, European Union finance ministers said currency zone outsiders the Czech Republic, Denmark, Poland and Sweden would also grant loans to the International Monetary Fund to help save the 17-nation zone.

But the EU said those lenders must first win parliamentary approval, while Britain made it clear it would not participate in the plan.

That leaves the euro zone more reliant than ever on major economies such China and on Russia, which has shown willingness to lend more to the IMF. The United States for its part is concerned about the lender's exposure to the euro zone.

Ministers had set an informal deadline of Monday to arrive at the 200 billion figure, which was agreed by EU leaders at a summit on December 8-9. and urged other nations to take part.

"Euro area member states will provide 150 billion euros of additional resources through bilateral loans to the fund's general resources account," the EU finance ministers said in a joint statement after their call.

"The EU would welcome G20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources," the statement said.

British Treasury sources said Britain had decided not to contribute to an increase IMF resources. "We were clear that we would not be making a contribution," one Treasury source said, while another added that there was "no agreement on the 200 billion" euro funding boost.

The EU was more diplomatic, however, saying in its statement that London would take a decision on the issue early in the new year in the framework of the Group of 20 economies.

The increase in IMF resources is seen as one pillar in a multi-pronged strategy to strengthen the euro zone's fire-fighting capability and build better defenses for the future. Another pillar is making the euro zone's existing bailout fund, the EFSF, more flexible in how it tackles the debt debacle.

NEW YEAR PRESSURES

Speaking during testimony to the European Parliament, ECB President Mario Draghi praised EU efforts to forge a new 'fiscal compact' as a solid base for responding to the crisis, and called the euro an "irreversible" project.

"I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility," he said.

"You have a lot of people, especially outside the euro area, who really spend a lot of time in what I think is morbid speculation, namely, what happens if? And they all have catastrophic scenarios for the euro area."

But he said bond market pressure on the euro zone would be "very significant" in the first quarter, with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralized debt all maturing.

"The pressure that bond markets will be experiencing is really very, very significant, if not unprecedented," he said.

Draghi spoke while EU ministers were still on their conference call, with discussions also looking at issues surrounding the euro zone's permanent bailout fund, with Finland unhappy about plans to weaken the unanimity rule governing how the European Stability Mechanism is run.

Finland's opposition, if not overcome, could scupper efforts to bring the ESM into force in July 2012, a year earlier than planned, to step up crisis-fighting efforts.

But the primary focus of debate was about the increase in IMF resources, with concerns growing that the EFSF is insufficient to handle the debt problems and with too long to wait until the permanent mechanism is up and running.

While EU leaders agreed at their last summit on the desire to boost IMF resources, there are doubts about whether the scheme will work, with not just London and Washington unenthusiastic, but Germany's Bundesbank too.

"Washington cannot make bilateral loans available to the IMF without Congress approving it," German Finance Minister Wolfgang Schaeuble told German radio. "There's no chance of that and the American government has always made that clear."

With the year-end looming, there is no let-up in the scramble to try to ease market pressure on euro zone stragglers, such as Italy and Spain, while those countries also set about implementing ever-tighter budget controls.

The ECB will offer three-year funds to banks for the first time on Wednesday, an effort to counter the freeze in interbank lending. France hopes banks will use the money to buy euro zone bonds but with banks under pressure to reduce risk and rebuild capital that may be a vain hope.

Market response to measures agreed at the December summit has been cool, mainly because of the reluctance of the ECB to step up bond purchases and declare its readiness to do so.

As a result, ratings agency Fitch concluded on Friday that a 'comprehensive solution' to the crisis was technically and politically beyond reach. It warned that six euro zone economies, including Italy and Spain, could be hit with credit downgrades in the near future.

Standard & Poor's has said it could soon downgrade nearly all the euro zone's 17 members.

RAJOY'S PROMISES

Speaking in Rome, Italian President Giorgio Napolitano called for a "strengthening of the still insufficient firewalls" necessary to defend sovereign debt and the euro.

Spain's incoming prime minister, Mariano Rajoy, promised deep cuts in public administration spending to meet tough deficit targets while offering tax breaks for companies in his first speech before parliament on Monday.

His first three reforms would concentrate on budget stability, completing a banking sector restructuring process and structural reforms in the public sector.

"We are confronting enormous difficulties and must make very demanding efforts," Rajoy told Parliament.

Italy's austerity budget, vital to Rome's attempts to get its accounts in order and do its part to try to save the euro from collapse, enters its final stretch this week with unions still on the warpath.

But given doubts about the IMF getting more money and the fact the euro zone's rescue funds have taken so long to set up, investors' focus remains overwhelmingly pinned on the ECB.

"We believe the resolution of the euro debt crisis will remain the principal theme in 2012. All other themes are likely to be derivatives of the crisis," Deutsche Bank analysts Mark Wall and Gilles Moec said in a note. "We see greater ECB involvement as inevitable. Very easy monetary policy for longer is also likely."

Euro zone policymakers said the ECB's role in the crisis was impossible to communicate clearly because of legal and political constraints. But they said the bank would not allow the crisis to threaten the survival of the currency bloc.

A declaration from the ECB that it would buy unlimited amounts of euro zone bonds for as long as necessary would immediately calm markets, but would probably break EU law and would relax pressure on politicians to reform their economies.

Instead, the bank was likely to keep quietly buying enough Spanish and Italian bonds to keep both countries on the market but with financing costs sufficiently high to keep pressure on their lawmakers to pursue tough reforms.

(Additional reporting by Marc Jones and Sakari Suoninen in Frankfurt, Jan Strupczewski and John O'Donnell in Brussels; Writing by Mike Peacock, Luke Baker and Robin Emmott; Editing by Jeremy Gaunt and Kevin Liffey)

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Comments (11)
FBreughel1 wrote:
May be already be too late as the financial markets found out that UK total debt have been piling up to 950% of GDP. The word is out. Little wonder British politicians were so anxious this weekend to split up its City’s banking system. No currency devaluation, no stimulation packages and no inflation is going to help here anymore.

Dec 19, 2011 6:05am EST  --  Report as abuse
breezinthru wrote:
If Germany thinks the Eurozone is a bad loan risk, then why should anyone doubt them?

Dec 19, 2011 8:01am EST  --  Report as abuse
scythe wrote:
@ FBreughel1 – interesting comment, any links?

two links for you that were interesting reading re eurozone:

(pdf) Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis (IMF Working Paper 2011)
www.imf.org/external/pubs/ft/wp/2011/wp1168.pdf

(pdf) Markets – The Credit Rating Agencies (Journal of Economic Perspectives 2010)
http://pubs.aeaweb.org/doi/pdf/10.1257/jep.24.2.211

The last link came from the references in the IMF Working paper
(quote ” White (2010) provides an excellent overview of the literature on credit rating agencies including on the evidence of their sluggishness in making corporate rating announcements in the US.”)

Dec 19, 2011 11:34am EST  --  Report as abuse
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