Charles Dallara, head of the Institute of International Finance who negotiated a Greek debt swap on behalf of private bondholders, said too much focus by regulators on austerity could hurt Europe’s economic recovery.
“We are continuing to see a contraction of credit in many parts of Europe,” Dallara said today in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “This is not consistent with the rebound in the European economy that we all agree is needed.”
Governments across Europe are paring public spending as they grapple with debt and banking crises that have led to bailouts for Greece, Ireland and Portugal. Short-term cuts “may be overdone” and could hurt growth in the region, Dallara said.
“We are calling for a rebalancing of some aspects of the current strategy in Europe to ensure that there is not an excess of near-term austerity,” said Dallara, managing director of the Washington-based IIF, which represents more than 450 firms.
The IIF also urged European policy makers to expand their crisis fund, calling recent decisions on the amount available to fight the region’s debt turmoil “disappointing.”
Increasing the size and flexibility of crisis-fighting tools is “essential for reassuring markets that the euro area has the resources and commitment to assist member countries facing contagion risks and difficulties in accessing capital markets,” Dallara wrote in a letter prepared for next week’s meetings of the International Monetary Fund and of the World Bank.
Euro-area finance ministers last month decided that 500 billion euros ($656 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 crisis. The decision stopped short of a bolder step considered before the meeting as a German-led coalition of creditor countries rebelled against imposing further burdens on bailout-weary taxpayers.
The IIF believes that the European Stability Mechanism needs “a significant” boost, “especially in view of the outstanding commitment of the euro area to continue supporting members under financial assistance programs until they regain market access, provided their programs are kept on track,” Dallara wrote.
The Washington-based International Monetary Fund, which is co-financing the bailouts in Greece, Portugal and Ireland, has been seeking $600 billion from member nations to be able to increase lending by $500 billion.
Dallara’s letter was addressed to Singapore Finance Minister Tharman Shanmugaratnam, who chairs the IMF’s steering committee, and to Polish Central Bank Governor Marek Belka, his counterpart on the World Bank’s steering committee.
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