Lagarde sees deal in the making on IMF funding

WASHINGTON Thu Apr 19, 2012 2:50pm EDT

IMF Managing Director Christine Lagarde listens to a question at a news conference at the Spring Meetings 2012 of the IMF and World Bank Group in Washington, April 19, 2012. REUTERS/Larry Downing

IMF Managing Director Christine Lagarde listens to a question at a news conference at the Spring Meetings 2012 of the IMF and World Bank Group in Washington, April 19, 2012.

Credit: Reuters/Larry Downing

WASHINGTON (Reuters) - International Monetary Fund chief Christine Lagarde said on Thursday she expects to win a big boost in funding to help the lender contain damage from the euro-zone debt crisis now that Europe has taken significant steps on its own.

Calling the euro zone the "epicenter of potential risk" for a world economic recovery that is "timid and fragile," Lagarde also urged European Union policymakers to directly inject some bailout funds into their troubled banks.

"We expect our firepower to be significantly increased as an outcome of this meeting," she said at a news conference to kick off the spring meetings of the IMF and World Bank.

The IMF wants to secure at least $400 billion in new funding, which would double its firepower to deal with the euro zone debt crisis and any spillover to other countries. The IMF firewall would complement the $1 trillion in emergency funds for Europe agreed upon by the EU leaders last month.

A larger IMF war chest to safeguard countries could help ease concerns in financial markets over the risks of global contagion. Investors are growing increasingly worried that Italy and Spain will fail to ratchet down their budget deficits as their economies shrink, forcing them to join Greece, Ireland and Portugal as bailout recipients, a prospect that weighed on global stocks on Thursday.

Concerns also are mounting about the resiliency of the European banking system. The IMF estimates its banks must shrink assets by $2.6 trillion over the next two years to meet higher capital standards and cover bad loans, causing credit to contract in an already weak economy.

Spain's banks are particularly vulnerable, hit by a plunging property market and the falling value of Spanish government debt. An auction on Thursday highlighted nervousness over Madrid's finances. Although bidding was solid, the government paid an uncomfortable 5.74 percent on its new 10-year bond.

Lagarde said the EU should use its bailout funds to inject capital directly into euro-zone banks, which would lessen the risk piled onto government balance sheets, and she called for the EU to supervise national banks.

"What we are advocating is that this be done without channeling through the sovereigns," she said.

While concern grows over the solvency of euro-zone banks, the IMF was making progress in persuading countries to bolster its crisis-fighting resources. So far, it has raised $320 billion - all from Europeans and Japan.

It wants additional contributions from the leading emerging economies, which are resisting until they win further assurances that they will get a larger say in running the international lender.

Finance ministers from the BRICS group of leading emerging market nations - Brazil, Russia, India, China and South Africa - were meeting in Washington on Thursday, and IMF financing was a high priority on the agenda.

Japanese Finance Minister Jun Azumi, whose country is contributing $60 billion to the IMF, said as he arrived in Washington that BRICS funding is indispensable for global growth and he expects them to announce IMF support at some stage.

China, Brazil and Russia have said they are willing to chip in but they want more voting power at the IMF in recognition of the growing role they are playing on the financial stage.

Lagarde acknowledged in her news conference that giving emerging economies a greater say is a priority and an issue she will raise in one-on-one meetings with IMF member countries.

"We are going to ask the membership to finish the job in terms of quota resources and in terms of governance," she said.

"There are changes that need to take place to better reflect the membership of the institution in terms of better economic strength, in terms of economic rule and we are not there."

Lagarde took aim at the United States for its delay in approving voting reforms the IMF members agreed to in 2010, and called on Washington to show leadership as the fund's largest shareholder.

The Group of Seven developed nations were set to talk about bulking up the IMF's resources at an informal meeting later on Thursday, and the topic was set to be taken up by the Group of 20 developed and developing nations at a dinner and again at a meeting on Friday.

The United States has declined to provide fresh funds but on Wednesday it threw its weight behind the effort to raise more capital from other nations. Previously, it had pressed for bolder action from Europe first.

Lagarde on Thursday also welcomed Europe's efforts in building its firewall. "There is a little bit missing here or there but it shows significant determination to defend their currency zone."

Despite progress, the euro zone problems still pose a threat to world economic recovery, she said. "We are seeing a light recovery blowing in the spring wind but we are also seeing some very dark clouds on the horizon."

World Bank President Bob Zoellick joined the call for deep and lasting economic reforms to secure the shaky global recovery.

"Countries both developing and developed need to focus on structural reforms that will be the drivers of future growth, otherwise the world will keep stumbling along," he said at a news conference to kick off the spring meetings.

(Writing by Stella Dawson; additional reporting by Lesley Wroughton, Leika Kihara; Editing by Neil Stempleman)