G-20 Fails to Agree on Use of IMF Resources as Europe Is Pressured to Act

By Simon Kennedy and Sandrine Rastello - Nov 5, 2011 7:02 AM GMT+0700

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Nov. 4 (Bloomberg) -- Juergen Michels, chief euro-area economist at Citigroup Inc., talks about the G-20's failure to reach an agreement on increasing the International Monetary Fund's resources and the outlook for the Greek debt crisis. He speaks on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)

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Nov. 4 (Bloomberg) -- Stuart Eizenstat, a partner at Covington & Burling and a former deputy Treasury secretary, talks about the Group of 20 summit in Cannes, France, and the failure of world leaders to agree on increasing resources of the International Monetary Fund. Eizenstat, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses Greek Prime Minister George Papandreou. (Source: Bloomberg)

World leaders balked at writing new checks to help bail out the euro-area, demanding its own governments first do more to fix the two-year-old debt crisis.

Global policy makers demanded more details of a week-old rescue package before they commit fresh cash to the International Monetary Fund, which could then lend to Europe’s bailout facility, German Chancellor Angela Merkel said at the end of a Group of 20 summit in Cannes, France. French President Nicolas Sarkozy said a deal may not come before February.

“The worst thing to do would be to try and cook up a number without being clear who was agreeing to what,” British Prime Minister David Cameron told reporters yesterday after the two-day gathering ended. “The job of the IMF is to help countries in distress, not to support currency systems.”

The refusal of major economies to stump up money now reflected irritation with Europe’s failure to resolve its crisis and foiled investor hopes that the summit would mark a turning point. The turmoil instead flared again before Greece’s government survived a confidence vote in parliament early today and Italian Prime Minister Silvio Berlusconi accepted IMF monitoring.

Greek Prime Minister George Papandreou won 153 votes in the 330-seat parliamentary chamber after saying he’ll begin discussions with opposition parties on creating a unity government as he tries to reach an accord on a European aid package needed to avert default.

Join Up

“There really are hardly any countries here that said they will join up” with the European Financial Stability Facility, Merkel told reporters, as she committed Europe to speeding up implementation of an Oct. 27 accord to boost the power of its EFSF rescue fund, recapitalize banks and write down Greece’s debt.

European and U.S. stocks fell, as did the euro. The Stoxx Europe 600 Index recorded its biggest weekly loss in six weeks and the euro declined 2.5 percent from last week to $1.3792. Ten-year Italian bond yields rose to a euro-era high, while rates on 10-year German debt capped the biggest weekly drop on record.

In a statement blaming Europe for fanning financial market tensions, the G-20 said it would ensure the IMF “continues to have resources to play its systemic role” and left it to its finance chiefs to debate how to provide more funds if needed.

Capital Buffers

The leaders approved a plan in which Deutsche Bank AG (DBK), BNP Paribas (BNP) SA, Goldman Sachs Group Inc. (GS) and 26 other banks will face additional capital buffers. The G-20 also agreed to limit the risks posed by so-called “too big to fail” banks and called on regulators to examine the effect of credit-default swaps on bond prices.

Beefing up their language on exchange rates, they vowed to “move more rapidly toward market-determined” currencies, and in an appendix welcomed China’s “determination” to increase the yuan’s flexibility. The group made progress on a future financial-transaction tax, Sarkozy said.

Europe’s bosses had planned to showcase their new crisis- fighting plan on the French Riviera and secure outside support for a doubling of the EFSF’s 440 billion euro ($607 billion) spending strength to protect bigger economies such as Italy from contagion spawned two years ago in Greece. That strategy blew up on the eve of the meeting when Papandreou called a referendum he later retracted and as Italy came under the spotlight of investors.

Good News

“Markets are constantly searching for good news and opportunities,” Canadian Prime Minister Stephen Harper said. “The sooner European leaders and others can simply confirm they’re moving forward, I think that would be the quickest way to get us out of this crisis of confidence.”

U.S. President Barack Obama said he’d had a “crash course” in European politics and that it’s important for its governments to send a “clear signal that the European project is alive and well.”

The chaos in Europe led countries from China to Russia and Brazil to say they would hold off pledging money even as they signaled a willingness to eventually do so through the IMF. The Washington-based lender can attach strings to its aid.

The BRICS group of emerging economies, comprising Brazil, Russia, India, China and South Africa, will decide on a “financial contribution” to the euro region in “coming weeks,” said Arkady Dvorkovich, the economic adviser to Russian President Dmitry Medvedev. Brazilian President Dilma Rousseff said she “has no plans or intentions to make any direct contribution” to Europe and that China told her it would also rather use the IMF.

War Chest

Options for bolstering the IMF’s $391 billion war chest when the time comes include opening a trust fund or not rolling back a 2009 cash increase. They also discussed increasing the amount of the fund’s Special Drawing Rights. The G-20 agreed to have the IMF create a new, six-month line of credit for countries “with strong policies and fundamentals.”

“Whatever number, you would have found it too small,” IMF Managing Director Christine Lagarde told reporters. “It’s much better to have a very strong unanimous support to do whatever it takes.”

Athens remained a focal point as Papandreou struggled to cling on to power amid a fourth year of recession. Politicians are trying to map out a plan to put in place a new government to ratify the rescue package as European powers froze 8 billion euros in assistance that Greece needs to dodge default.

Plan Backfires

Papandreou’s Oct. 31 decision to hold a ballot on the bailout backfired by splitting his party, roiling markets and drawing taboo-breaking warnings from EU powers that it could cost Greece its euro membership.

Prodded by counterparts, Berlusconi accepted IMF auditing of efforts to cut the euro area’s second-largest debt burden after Greece. While he has promised steps such as a higher retirement age and state-asset sales, investors say they don’t go far enough and his ability to push legislation through Parliament is hampered by the defection of two lawmakers from the ruling party.

“Berlusconi is conscious of the doubts that surround his plan,” Sarkozy said. The Italian premier said the surveillance had been “requested, not imposed” and that he turned down an offer of IMF money.

“We have thanked them and said we didn’t need those funds,” he said.

To contact the reporters on this story: Simon Kennedy in Cannes, France, at skennedy4@bloomberg.net; Sandrine Rastello in Cannes, France srastello@bloomberg.net

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