Europe Faces Pressure as G-20 Debates IMF Role

By Alan Crawford and Sandrine Rastello - Feb 24, 2012 10:44 PM GMT+0700

U.S., Chinese and Japanese officials say they will press euro-area countries to do more to merit outside help when the world’s largest economies gather tomorrow for a meeting dominated by Europe’s sovereign-debt woes.

European officials will push fellow Group of 20 nations to commit fresh cash to the International Monetary Fund to help defuse the region’s fiscal crisis, days after backing a second bailout for Greece. The Obama administration says Europe must first strengthen its firewall to prevent debts of countries such as Italy and Spain from becoming unsustainable.

G-20 finance ministers and central bank governors meet in Mexico City four days after euro-area governments sanctioned a 130 billion-euro ($175 billion) aid package for Greece and amid warnings by the IMF that concerns about debt sustainability could drag the world into another recession. While China, Japan, Brazil and Mexico say they are willing to help once Europe acts, the U.S. shows no signs of reaching for its checkbook.

“Europe will implicitly be the main political topic of conversation, in the lens of what will it take to get more contribution to the IMF,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “The Europeans clearly realize that they have to move first.”

‘Make More Efforts’

With demand from the European Union’s 500 million consumers slowing, China and Japan have signaled a commitment to help resolve Europe’s debt woes. The condition is that Europe “make more efforts to create a bigger firewall,” Japanese Finance Minister Jun Azumi said Feb. 20 in Beijing. Japan is considering contributing $50 billion to the IMF’s European rescue package, the Asahi newspaper reported Feb. 23, without saying where it obtained the information.

Treasury Secretary Timothy F. Geithner stepped up U.S. calls for Europe to boost firewall. While European action so far means it’s “much less likely” the debt crisis will trigger global contagion, the U.S. and other nations won’t commit fresh funds to the IMF until Europe makes its backstop more “credible,” he said in an interview on CNBC today.

“What we don’t want to see is the IMF substitute -- and it really cannot substitute -- for a stronger European response,” Geithner said.

European Funds

IMF Managing Director Christine Lagarde, who was French finance minister when the crisis surfaced in Greece in late 2009, is looking for an additional $500 billion in lending resources for the Washington-based fund. The 17 euro nations have pledged about $200 billion in new money.

European leaders will meet again in Brussels March 1-2 to review the mechanics of the 500 billion-euro permanent rescue fund, the European Stability Mechanism. The fund, which is to be implemented in July, one year earlier than originally planned, was set up to aid European Union member states that need help meeting debt payments.

While some officials and the European Central Bank favor combining the permanent fund with the temporary European Financial Stability Facility to produce a 750 billion-euro firewall, Germany has yet to show its hand and is calling for more IMF help to increase funds available to contain the crisis.

G-20 leaders meeting in the French resort of Cannes in November put off a decision on increasing aid to Europe. Mexican Finance Minister Jose Antonio Meade said Feb. 8 it’s still too soon to expect a deal on additional IMF funding. This weekend’s meeting will lay the ground work for a G-20 heads of state summit to take place in June in the Mexican resort of Los Cabos.

‘Clear Sequence’

“There’s a generalized recognition that having more resources available via the IMF might be something that people are prepared to sign up to provided they feel that Europe is doing enough to help itself,” Malcolm Barr, chief U.K. economist at JPMorgan Chase & Co. in London, said in a phone interview. “But there is a clear sequence.”

Fitch Ratings lowered Greece’s credit grade that day by two levels to C from CCC, saying a default is “highly likely in the near term.”

Stocks in Europe rose today, snapping a three-day decline. The rebound came a day after Commerzbank AG, Germany’s second- biggest lender, tumbled 6.6 percent as it and two other banks, Royal Bank of Scotland Group Plc and France’s Credit Agricole SA, booked losses on their Greek government debt.

European Economy

The European Commission, the EU’s executive body, said it expects the region’s economy to shrink this year. A euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate Feb. 22, below analysts’ forecasts. In contrast, the Manufacturing & Non-Manufacturing ISM Index, a gauge of manufacturing and non- manufacturing activity in the U.S., rose to 56.5 in January from 52.8 in the previous month.

“There’s a nascent recovery in the U.S.,” said Sony Kapoor, managing director at Re-Define, a London-based firm that advises governments on economic policy. “The biggest risk factor in the global economy is the worsening of the euro crisis,” he said.

Aside from the firewall, policy makers will probably discuss a successor for World Bank President Robert Zoellick, who said last week he would step down when his five-year mandate ends June 30.

Zoellick Successor

The World Bank board has said it expects to select his successor by its spring meetings that start April 20 in Washington, and will accept nominations until March 23.

A U.S. citizen traditionally holds the post under an informal agreement in which a European heads the IMF. While the U.S. has said it planned to nominate its candidate in coming weeks, officials from Brazil and China are pushing for a selection procedure that could yield a president who is not from the U.S.

“I’d be very surprised if you don’t see trial balloons being put forward,” Kirkegaard said. “This is exactly the right forum for the kind of informal discussions about that.”

To contact the reporters on this story: Alan Crawford in Mexico City at acrawford6@bloomberg.net; Sandrine Rastello in Mexico City at srastello@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.