G-20 Snubs Germany on IMF Help

By Alan Crawford - Feb 27, 2012 7:17 AM GMT+0700

Group of 20 nations rebuffed German- led calls to come to Europe’s rescue as it battles the region’s debt crisis, saying any decision on outside help hinges on the euro area delivering more financial firepower within two months.

A European review of its financial firewall against the crisis next month is “essential” before any consideration to “mobilize resources” for the International Monetary Fund, the G-20 said yesterday in a statement in Mexico City. Progress will be assessed in April, when officials gather in Washington for the IMF’s spring meetings.

G-20 officials meeting in Mexico over the past two days sided with the U.S. and deferred Europe’s bid to raise fresh money for IMF that could be used to defuse the crisis. That is the second time in almost four months that the world’s biggest economies have declined to rally to Europe’s side, even as the IMF warns the crisis risks triggering another global recession.

The spotlight now shifts to Germany, Europe’s biggest economy, which is weighing whether to agree to beef up the region’s financial backstop to a potential 750 billion euros ($1 trillion) at a March 1-2 European summit.

“Europe has no balance of payments deficit so it doesn’t really need any outside money,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an e-mail response to questions. “It needs their own policymakers, especially Germany, to show leadership.”

EU Pleas

Germany went in to the Mexico meetings urging G-20 nations to find fresh money for the IMF. In a Feb. 15 document, the European Union called on G-20 countries “and other financially strong IMF members to support the efforts to safeguard financial stability by contributing to the increase in IMF resources.”

Instead, in Mexico, the U.S. led calls on Europe to step up, with Treasury Secretary Timothy F. Geithner saying in a speech that the region needed to make their crisis-fighting commitments “credible.” German Finance Minister Wolfgang Schaeuble said a deal struck Feb. 21 for a second Greek bailout of 130 billion euros showed “Europe has done its homework.”

The exchange underscored G-20 divisions as Japan, Brazil, Russia and the U.K. joined with the U.S. and Canada in prodding the euro-area to boost its crisis defenses.

“Until we see the color of their money, I don’t think you are going to see any money from the rest of the world,” U.K. Chancellor of the Exchequer George Osborne said in an interview in Mexico City.

Merkel’s Greek Vote

While the German government has yet to show its hand on a plan to combine the region’s temporary and permanent rescue funds, Chancellor Angela Merkel has signaled she is open to review the matter at next week’s EU summit in Brussels. Her government must first win a parliamentary vote in Berlin tomorrow sanctioning last week’s bailout for Greece.

EU Economic and Monetary Commissioner Olli Rehn, asked in Mexico if he expected a deal to combine the funds at the Brussels summit, said he anticipated a result “in the course of March.”

“The Germans have their own sequencing” and “want Greece out of the way” before debating the firewall, Jacques Cailloux of Royal Bank of Scotland Group Plc., said by phone. “Any hope there could have been for an agreement on a higher firewall as early as this week’s summit is fading.”

Even so, the G-20’s stance on additional funds is not as big a focus for investors as Greece and the European Central Bank’s decision to offer banks unlimited liquidity for three years, the second such offering in three months, Cailloux said.

Bonds Rise

Pressure for a deal in Mexico eased after European bond markets reacted positively to last week’s agreement to help Greece avert the euro-area’s first sovereign default.

Italy’s 10-year bonds rose for a seventh week, the longest run of gains in the euro-era, while Spanish 10-year bonds had their biggest weekly advance in a month.

Europe’s Stoxx 600 (SXXP) index still slipped 0.4 percent last week on concern that Greece won’t be able to implement the austerity measures needed for the rescue, and as the European Commission said the euro area’s economy will shrink this year.

The G-20 statement said that growth expectations for 2012 are moderate and downside risks continue to be high along with market volatility. With oil prices undergoing the longest rally in two years amid tension with Iran and Syria, G-20 countries said they were “alert to the risks of higher oil prices, and welcome the commitment by producing countries to continue to ensure adequate supply,” the statement showed.

‘Not the Moment’

For all that the meeting recognized the “significant progress” made this year in Europe and the U.S. in stemming risks, “this is not the moment for complacency,” Mexico’s Central Bank Governor Agustin Carstens told reporters.

IMF chief Christine Lagarde is seeking to raise the fund’s lending capacity by $500 billion to fend off “further shocks” to the global economy. Euro-area governments have pledged about $200 billion of the total. Geithner told reporters that he won’t go to Congress to seek a U.S. contribution because “we don’t think that’s necessary or desirable.”

Brazil’s representative to the Washington-based lender, Paulo Nogueira Batista, said in an interview that the U.S. refusal to contemplate new cash for the fund was hampering the drive to raise money from other nations.

Brazil’s Finance Minister Guido Mantega, after meeting with his counterparts from Russia, India, China and South Africa, said that the BRICS group of major emerging markets will only contribute more funding for Europe if the region’s leaders follow “precisely to the letter” a 2010 agreement to give them a bigger say in how the IMF is run.

‘Leadership Role’

Canadian Finance Minister Jim Flaherty pointed the finger at Germany, saying that it was time for Europe’s dominant country to “take that leadership role very seriously and come up with an overall euro-zone plan.”

While the government in Berlin faced criticism, the Frankfurt-based ECB was singled out for praise by both Geithner and Lagarde, with the IMF chief saying the central bank’s actions helped avert “derailment” of the global recovery.

“Given some of the official narrative in the runup to the meeting, few expected it to yield much in terms of concrete agreements,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an e-mailed response to questions. Even so, “it would be unwise for markets and policymakers to think that ECB liquidity injections, while powerful, would durably substitute for proper actions to improve growth, competitiveness and debt solvency.”

To contact the reporters on this story: Alan Crawford in Mexico City at acrawaford6@bloomberg.net;

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