Bloomberg News

Europe Eyes Bigger IMF War Chest as Firewall Tops $1 Tril

March 31, 2012

European governments called for a bigger global financial emergency fund after engineering a firewall to fight the region’s debt crisis that tops the symbolic $1 trillion mark.

Euro-area finance ministers decided yesterday that 500 billion euros ($667 billion) in fresh money would go along with 300 billion euros already committed to create an 800 billion- euro defense against the two-year-old turmoil.

Europe is counting on those sums, plus the European Central Bank’s extra lending and bond-buying programs, to demonstrate that it is on the road back to stability and encourage Group of 20 economies to bulk up the International Monetary Fund’s anti- crisis coffers at an April 19-20 meeting.

“Europe is aware of its responsibility for the international economy,” German Finance Minister Wolfgang Schaeuble told reporters today after a two-day meeting of European finance officials in Copenhagen. “If the IMF takes precautions to prevent possible contagion or threats to the world economy, then Europe for its part will make a decisive contribution.”

While welcomed by European central bankers, the firewall decision stopped short of a bolder step mooted before the meeting as a German-led coalition of creditor countries rebelled against imposing further burdens on bailout-weary taxpayers.

Permanent Fund

As flagged by German Chancellor Angela Merkel, the rich countries no longer insisted on deducting sums pledged and disbursed by the temporary rescue fund from the 500 billion euros to be wielded by the permanent fund, the European Stability Mechanism.

Those countries refused to go further, tossing out a proposal to make the money left in the temporary fund fully available. Instead, that 240 billion-euro sum will be used only to get the ESM up to full capacity during its two-year buildup starting in July.

The total would be too little to cope with an emergency in Italy or Spain, which have combined gross borrowing needs of 800 billion euros in the next three years, or to deal with additional bank recapitalizations, said Malcolm Barr, an economist at JPMorgan Chase & Co. in London.

Europe’s move “is likely to be a disappointment not only to some within the euro area, but also to those outside who wanted to see ‘the color of European money’ before being prepared to commit more resources to the IMF,” Barr said in an e-mailed note.

Rebutting Criticism

European officials wheeled out a variety of numbers -- including bilateral loans to Greece in 2010, loans from a now- defunct centrally managed fund and the ECB’s 1 trillion-euro cash infusion to banks -- to rebut international criticism of Europe’s response to the crisis.

Finance ministers also agreed to get the ESM up to full capacity by mid-2014, two years earlier than planned. Governments will pay in two installments of capital this year, two more in 2013 and the final tranche in the first half of 2014.

Some countries might be stretched to meet that timetable. Schaeuble said yesterday “some member states said this morning they have difficulties paying these two tranches already this year.” He labelled the payment schedule a “recommendation.”

Dollar Conversion

In his own twist on the mathematics, Irish Finance Minister Michael Noonan said a conversion into dollars makes them more impressive. “The market reaction to these is to the dollar amounts so anything that gets you $1 trillion looks like a serious firewall,” he told reporters.

To underscore the point, the dollar figure was featured in the ministers’ declaration, in an effort to show emerging countries such as China and Brazil that Europe is on top of the crisis and unlock more IMF support.

In a statement in Washington, IMF Managing Director Christine Lagarde said Europe’s upgraded strategy will “support the IMF’s efforts to increase its available resources for the benefit of all our members.”

Market Tensions

Euro-region national central banks plan to steer 150 billion euros to the IMF as a downpayment toward other countries chipping in. That sum was left out of Europe’s firewall calculation because it would be managed by the global powers that run the Washington-based IMF.

An IMF boost is “not for Europe, it’s not a specific fund or specific account for Europe,” ECB Vice President Vitor Constancio said. “It is a recognition that in general for the world economy the IMF needs to have more resources.”

Much of the credit for the lessening of European market tensions goes to the ECB’s unprecedented three-year loans to banks since December. Ten-year bond yields in Spain, for example, have fallen to 5.35 percent from 6.70 percent on Nov. 25.

A warning that rescue programs alone won’t restore Europe to economic health came from Jens Weidmann, a Merkel aide in the early stages of the debt crisis who became head of Germany’s central bank last year.

Political leaders “shouldn’t succumb to the illusion that firewalls can reach the sky, because sooner or later we’ll get to the limits of credibility,” Weidmann said. “You can only solve the crisis by tackling the causes. Firewalls won’t solve the crisis.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Copenhagen at jstearns2@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net


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