Euro zone governments have agreed to put up an additional €150-billion ($202-billion U.S.) to backstop their foundering currency union, opening the door for a broader international effort to contain the European debt crisis.
In a conference call that lasted more than three hours Monday, European finance ministers said they would lend the money to the International Monetary Fund, the Washington-based lender of last resort for the 187 nations that make up its membership.
The IMF is getting a bigger role because it has the heft to impose tough conditions on any country that might require a bailout. The fund also is seen as a neutral actor that will protect the interests of countries that choose to play a role in the European rescue.
A significant financial commitment from core European countries is seen as a prerequisite for support from cash-rich countries such as China, India and Brazil. The European finance ministers indicated that they believe they have scrounged all the resources they have to put a stop to their debt crisis and pleaded with their allies in the Group of 20 nations to help them finish the job.
“EU member states support a substantial increase in the IMF’s resources,” the finance ministers said in a statement. “The EU would welcome G20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources so as to fill global financing gaps.”
The call was arranged to reinforce confidence in the rescue plan that was agreed to by leaders less than two weeks ago in Brussels. An initial burst of enthusiasm for the latest proposal to contain the debt crisis faded last week as investors questioned the commitment of European governments to come to the aid of the European Union’s weakest members.
The fulfilment of the euro zone’s pledge to deliver a substantial contribution to the IMF did little to buoy investors. North American equity markets remained lower after the conclusion of the finance ministers’ call and the euro continued to trade at its lowest levels against the U.S. dollar since January.
The pledge of €150-billion for the IMF was short of the €200-billion European leaders suggested was needed to erect a financial firewall big enough to convince investors that a sovereign default or the collapse of a big bank wouldn’t lead to catastrophe. The 10 European Union members who use their own currencies refrained from making definitive commitments to the IMF. The statement suggested it could be several weeks before Britain decides on the degree to which it will participate.
Earlier Monday, European Central Bank president Mario Draghi cast a pall over the finance ministers’ talks, warning in testimony to the European Parliament of a difficult start to 2012.
The basis for Mr. Draghi’s concern is the expiration of some €230-billion of bank bonds and as much as €300-billion of sovereign debt in the first quarter. Unless market sentiment changes dramatically in the next few weeks, that means banks and governments will be facing a significant increase in their borrowing costs because investors almost certainly will demand higher yields on European debt.
“The pressure that bond markets will be experiencing is really very, very significant, if not unprecedented,” Mr. Draghi said.
The IMF will need more money if it’s to convince investors that it has the resources to backstop countries such as Italy, Spain and Belgium. Those three countries, which are considered the vulnerable to financial collapse, have financing needs over the next two years of a combined €711-billion. The IMF currently has only about €290-billion available to lend.
“We welcome the EU finance ministers’ support for a substantial increase in the IMF’s resources, as we work to strengthen our capacity to fulfill our systemic responsibilities to our global membership,” the fund said in a statement.
Germany and France will account for almost half of the euro-area loan to the IMF, commensurate to their status as two of the fund’s biggest shareholders. Greece, Ireland and Portugal, which were bailed out by their partners in the euro and the IMF, won’t be asked to participate. The Czech Republic, Denmark, Poland and Sweden, which are non-euro countries, “indicated” they would make contributions to the IMF, the statement said. Britain “indicated that it will define its contribution early in the New Year in the framework of the G20.”