Euro Nations Renew Talk of IMF Role

By James G. Neuger and Gregory Viscusi - Nov 30, 2011 3:35 AM GMT+0700

Europe’s effort to expand its bailout fund is falling short, forcing euro-area finance ministers to consider greater roles for the International Monetary Fund and the European Central Bank to insulate Spain and Italy from the debt crisis.

A plan hammered out last month to expand the European Financial Stability Facility’s firepower to 1 trillion euros ($1.3 trillion) with leveraging will be “very difficult to reach,” Luxembourg Finance Minister Luc Frieden told reporters today before euro-area finance chiefs met in Brussels.

With prodding from the U.S. after a series of stop-gap accords failed to protect Italy and Spain from market turmoil, the ministers started talks on channeling ECB loans to cash- strapped euro nations through the IMF, aiming to bring the central bank on to the front lines without violating its ban on direct lending to governments.

“We envisage a larger role for the IMF,” said Dutch Finance Minister Jan Kees de Jager. “It could be through a general increase of resources. It could be through new arrangements to borrow. And it should come from both Europe and non-European countries. The situation is quite urgent and we need solutions.”

‘Comprehensive’ Fix

Any new plan would be a fifth “comprehensive” fix after an October blueprint didn’t stop a widening rout in Italian markets or quell speculation that France will lose its top credit rating. Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to step in.

The rescue fund “alone will not be able to solve all the problems,” Frieden said. “We have to do so together with the IMF and with the ECB in the framework of its independence.”

While the 17 euro-area finance ministers should meet tonight’s self-set deadline of working out how to leverage the rescue fund, the method is unlikely to unleash the targeted 1 trillion euros.

De Jager spoke of bulking up the EFSF by a multiple of 2 to 2.5. With roughly 270 billion euros of EFSF funds uncommitted, that would put the enhanced EFSF in the neighborhood of 675 billion euros at most.

The first leveraging option, using the EFSF to insure 20 percent to 30 percent of new bond sales, faces a credibility test in the markets and may not be ready until January. It also might splinter the Italian and Spanish bond markets, by creating insured bonds that are more attractive than bonds currently trading, two officials familiar with the discussions said.

Last Meeting

Spanish Finance Minister Elena Salgado, attending her last meeting after her government lost Spain’s Nov. 20 election, said it’s best not to set a target for the EFSF.

“Setting a strict quantified limit means markets will always bet on such a limit,” Salgado told reporters. “I think it’s a better option not to set a limit and simply to say it must be as much as possible.”

Italian Prime Minister Mario Monti, who also serves as finance minister, is attending his first euro gathering since heading a cabinet of technocrats that replaced the government of Silvio Berlusconi. Monti met separately with Luxembourg’s Jean- Claude Juncker and French Finance Minister Francois Baroin today.

The IMF is co-funding the bailouts of Greece, Ireland and Portugal and is preparing to send a team to Italy for an unprecedented audit of that country’s efforts to cut its debt.

Enough Money

With about $390 billion currently available for lending, the Washington-based IMF may not have enough money to meet demand if the global outlook worsens, Managing Director Christine Lagarde has said.

Group of 20 leaders earlier this month discussed a possible increase in IMF resources as a way to channel loans from the rest of the world. They failed to agree on a number and demanded more details of Europe’s plans to stem the debt crisis before committing fresh cash.

Lagarde has since continued meeting with officials about potential contributions. She has recently traveled to China, Russia and Japan and this week she is in Mexico and Brazil, which have said they are willing to do their part provided Europe boosted its own rescue efforts.

Speaking from Lima yesterday, Lagarde, a former French finance minister, said Europe needs “a comprehensive, rapid set of proposals that would form part of a comprehensive solution, and the IMF can be a party to that.”

‘Endgame’

Europe’s debt crisis is entering its “endgame,” according to Nomura Holdings Inc.’s Jens Nordvig, who expects a tighter fiscal union and steps by the ECB to reduce borrowing costs.

“We’re now heading into a very final phase of this crisis where we are at a crossroad, where we either have to have a proper backstop or we’re going to face a breakup,” Nordvig, managing director for currency research in New York, said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “The most likely scenario is one where the ECB provides a backstop in the next couple of months.”

At a bond auction today, Italy was again forced to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts when it sold 7.5 billion euros of bonds, short of the 8 billion-euro target. Italy, whose debt amounts to 1.9 trillion euros, has to refinance about 200 billion euros of maturing bonds next year and more than 100 billion euros of bills.

Financial Aid

Over the opposition of the two Germans on its 23-member council, the ECB has bought 203.5 billion euros of bonds of three countries receiving financial aid -- Greece, Ireland and Portugal -- plus Italy and Spain. Yet yields have continued to climb.

The U.S. and British central banks have been buying their country’s debt in much larger quantities, and that’s one reason their bond yields are at record lows in spite of debt and deficit figures that in some cases are worse than Italy’s and Spain’s.

“From our perspective, we see how the Bank of England operates, and we see how the Fed operates, but I understand it’s not legally possible for Frankfurt to operate in the same way,” said Irish Finance Minister Michael Noonan. “So we’ll have to say if somebody has come up with a clever formula to allow that.”

Merkel, Sarkozy

An agreement last week between German Chancellor Angela Merkel and French President Nicolas Sarkozy to stop telling the politically independent ECB what to do lasted just a few days, with French officials renewing their call for more ECB action and German officials arguing against expanding the bank’s debt purchases.

Four weeks after taking over from Jean-Claude Trichet, ECB President Mario Draghi hasn’t tipped his hand about a possible role for the central bank, apart from saying the ECB’s 18-month- old bond-buying program is temporary and limited.

“The ECB has to save the euro,” Holger Schmieding, chief economist of Joh. Berenberg Gossler & Co., said in an e-mailed note. “ECB members and Berlin may be starting to realize this.”

The finance ministers backed France’s Benoit Coeure to succeed Italy’s Lorenzo Bini Smaghi on the ECB’s Executive Board, according to a person familiar with the matter. They also approved the disbursement of a sixth rescue loan to Greece.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Gregory Viscusi in Brussels at gviscusi@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net