EU States to Send IMF $267 Billion in New Crisis Fight

By James G. Neuger and Gregory Viscusi - Dec 9, 2011 12:24 PM GMT+0700

European leaders added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules, seeking to lure the European Central Bank into stepping up its rescue operations.

In an accord hailed by ECB President Mario Draghi, the leaders laid out a new “fiscal compact” to prevent future debt runups, accelerated the startup of a planned 500 billion-euro rescue fund and scaled back bondholder loss-sharing provisions.

“It’s a very good outcome for euro-area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries,” Draghi told reporters after 12 hours of overnight talks in Brussels.

European leaders navigated a labyrinth of political, legal and economic constraints amid unrelenting pressure from financial markets to craft a new approach to fighting the crisis, which now threatens to engulf Italy and Spain.

At the same time, the leaders ventured into untested legal territory by plotting to anchor the tougher budget rules in a separate euro-area treaty after Britain and Hungary balked at amending the existing treaty covering all 27 European Union countries.

The euro was little changed in reaction to the measures, the fifth wide-ranging crisis-containment package since the unprecedented 110 billion-euro bailout of Greece and was followed by the setup of a 440 billion-euro rescue fund in May 2010.

Extraction

The currency was at $1.3335 as of 2:01 p.m. Tokyo time, close to its level at the end of European trade. Stocks in Asia came off their lows of the day, with the MSCI Asia Pacific Index down 1.9 percent, after falling as much as 2.3 percent. Futures contracts on the U.S. Standard & Poor’s 500 Index were also 1.9 percent lower.

European governments for the first time extracted a contribution from the euro region’s national central banks, getting them to lend 150 billion euros to the International Monetary Fund’s general resources. Central banks from non-euro EU states will chip in around 50 billion euros more.

European governments are counting on that downpayment to attract reserve-rich emerging markets such as China to join in the rescue, a month after Europe’s efforts to solicit outside aid ran into obstacles at a Group of 20 meeting.

“I appreciate this demonstration of leadership from Europe and I’m hopeful that others will also do their part,” IMF Managing Director Christine Lagarde said after attending the Brussels summit.

The focus now shifts to the ECB’s central management, after Draghi said last week that “other elements” could follow a push by governments to push through a fiscal union. At the same time, Draghi yesterday damped expectations that a Brussels deal on fiscal discipline would prompt it to rapidly supplement its 207 billion-euro bond-buying operations.

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