Europe Looks to IMF, China for Rescue-Fund Cash

By Bloomberg News - Oct 28, 2011 3:46 PM GMT+0700

European officials are studying the idea of an International Monetary Fund channel for money for their enlarged rescue fund, as China said it needed more detail on any potential plan before deciding whether to contribute.

The European Financial Stability Facility may explore setting up a special purpose vehicle with the IMF, Klaus Regling, the EFSF’s chief executive officer, said at a briefing in Beijing today. Separately, Chinese Vice Finance Minister Zhu Guangyao said his government wants to hear about particulars such as the extent of loan guarantees to countries including Italy, and how the senior-debt portion would be structured.

European leaders aim to tap China, holder of the world’s largest foreign-exchange reserves, for help after moving yesterday to contain the crisis by writing down Greek debt and targeting an expansion of the EFSF to about $1.4 trillion. China may seek to increase its influence at the IMF, a global lender of last resort, as a quid pro quo for contributing, said Tomo Kinoshita, an economist at Nomura Holdings Inc.

It may suit China “to contribute to European and global financial stability by injecting funds through an IMF channel,” said Kinoshita, deputy head of Asia economics research at Nomura in Hong Kong. The nation would “try its best politically” to benefit, he added.

Stocks Gain

Asian stocks climbed, extending the best weekly rally since 2009, on renewed confidence in the global economy after better- than-forecast U.S. data added to signs of progress in Europe. The MSCI Asia Pacific Index rose 1.3 percent as of 4:30 p.m. Hong Kong time.

Regling said China hasn’t set any conditions for buying EFSF bonds after being a “good” and “loyal” purchaser of the securities so far.

China’s Zhu told reporters in Beijing that details “are still under discussion” and that his government wants to know more. Zhu said he didn’t expect that information to be available until late November or December at the earliest.

“Of course we must wait for the comprehensive technical structure to be very clear and have serious and specialized discussions before making a decision on investment,” Zhu said.

Sarkozy Outreach

French President Nicolas Sarkozy spoke with Chinese counterpart Hu Jintao by phone yesterday and the two agreed to “cooperate closely” to ensure global growth and stability, Sarkozy’s office said in a statement. Regling said that he didn’t expect a “precise outcome” from talks with Chinese officials during his trip.

Japan plans to support the increase in the fund and is awaiting details, a person familiar with the matter said yesterday. Japan anticipates waiting until November for specifics on how it may be able to help with the European rescue effort, a second person said, with both speaking on condition of anonymity because the discussions are private.

Officials from Brazil, Russia, India, China and South Africa -- the so-called BRICS -- said in a Sept. 22 statement they are “open” to contributing to global financial stability through the IMF or other international financial institutions. Asia has bought 40 percent of EFSF bonds this year, according to Regling.

Not Enough

The IMF said last month that its uncommitted reserves, now about $393 billion, may not be enough to meet all loan requests should global economic prospects worsen. Group of 20 leaders meeting in Cannes, France, next week are scheduled to discuss whether the war chest is sufficient.

Creating a special purpose vehicle within the IMF would require approval by the organization’s executive board.

The IMF has channeled money from selected member countries for specific purposes before. In the 1970s, oil producers contributed to a pool that financed loans to economies hurt by the increase in the price of crude. Currently, some nations chip into a trust fund that helps lend to the poorest nations at lower rates. These pools have been used to lend to countries, not to intervene in financial markets.

Nations such as China or India have enough currency reserves to participate in a fund focused on Europe, said Mohsin Khan, a former IMF department director who is now a senior fellow with the Peterson Institute for International Economics in Washington. Such support may come at a price, Khan said.

Quid Pro Quo

“I think there will be some quid pro quo on this,” he said. “They would like a bigger role in global financial governance and I think they will also see it as they are systemically important and they are doing something good for the world.”

China’s foreign-exchange holdings have topped $3 trillion this year, swelled by the nation’s trade surplus and inflows of speculative capital.

The IMF is involved in programs for Greece, Ireland and Portugal -- nations at the center of the debt crisis -- while China is “an important member” of the organization, Regling said. The possibility of a special vehicle “needs to be explored,” he said.

Regling was due to meet with People’s Bank of China and finance ministry officials today, he said.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net