CORRECTED-Europe should boost bailout fund, consider euro bonds-Lagarde
* IMF says larger euro firewall needed to deal with Italy, Spain
* Lagarde wants more fiscal risk-sharing, such as euro zone bonds
* IMF wants $500 bln in new lending resources, sees big funding gap
By Noah Barkin
BERLIN, Jan 23 (Reuters) - The head of the IMF called on European governments to boost the size of their rescue fund and consider financial risk-sharing steps like common euro zone bonds as a way out of their sovereign debt crisis.
In a speech at the German Council on Foreign Relations in Berlin on Monday, International Monetary Fund (IMF) Managing Director Christine Lagarde said the world economy faced a "defining moment" that required quick, collective action.
To help meet the challenge, she urged leading powers to back an increase in resources for the Washington-based lender to help fill a global financing hole that the IMF believes could reach $1 trillion over the coming years.
"The longer we wait, the worse it will get. The only solution is to move forward together," Lagarde said, according to an embargoed copy of her remarks provided by the IMF before delivery.
"We must all understand that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral."
The IMF has helped fund a series of euro zone bailouts over the past two years, but with big European countries like Italy now under threat, it wants to boost its lending capacity, currently estimated at around $380 billion.
Members of the single currency bloc have agreed to inject close to $200 billion, but countries like the United States, Canada, China and Japan have been cool on channeling more funds to the IMF. Many are keen for Europe to take more decisive steps to resolve its debt crisis first.
Lagarde said the IMF was seeking to increase its lending resources by up to $500 billion, including the funds already pledged by Europe. The Fund estimates that up to $1 trillion in global financing could be needed over the coming years.
"I am convinced that we must step up the Fund's lending capacity," Lagarde said.
SOLVENCY CRISIS RISK
She praised decisions by euro zone governments to enforce stricter fiscal discipline and a move by the European Central Bank to provide long-term liquidity to banks, but said these steps formed mere "pieces" of a comprehensive crisis solution.
Lagarde warned specifically about the risks that higher funding costs for Italy and Spain lead to a solvency crisis, saying this would have disastrous consequences for systemic stability.
"Adding substantial real resources to what is currently available by folding the EFSF into the ESM, increasing the size of the ESM, and identifying a clear and credible timetable for making it operational would help greatly," Lagarde said, referring to the euro zone's current and future rescue funds.
She urged European leaders to complement the "fiscal compact" they agreed last month with some form of financial risk-sharing, mentioning euro zone bonds or bills, or a debt redemption fund as possible options.
Lagarde also called for bolder steps from countries outside of Europe, saying the United States had a special responsibility as the world's largest economy.
She said emerging and advanced countries with large current account surpluses should take steps to encourage domestic demand as a way to support global growth.
In an apparent reference to Germany, she said there was a "large core" in Europe where fiscal consolidation could be more gradual. Lagarde also stressed the need for timely easing of monetary policy as euro zone economies and inflation fall.
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