Euro Zone Pursues IMF Lending Plan
European finance ministers discussed ways of boosting IMF resources to build a better firewall against the debt crisis on Monday, while also assessing plans for tighter euro zone fiscal rules that they hope will prevent the problems from worsening.
With new governments in Italy and Spain redoubling austerity efforts, the EU ministers were locked in a three-hour teleconference call with discussions focused on the draft text of a new "fiscal compact" that they aim to have finalized by the end of January, EU officials said.
The call, expected to end around 1730 GMT, was also expected to examine issues surrounding the euro zone's permanent bailout fund, with Finland unhappy about plans to weaken the unanimity rule governing how the European Stability Mechanism is run.
Having agreed to offer 150 billion euros to the International Monetary Fund to raise its crisis-fighting capacity, ministers were debating the size of individual bilateral loans to the Fund, with up to 50 billion euros more expected to come from countries outside the euro zone.
There are doubts about the scheme and whether it will succeed in bolstering rescue funds. Germany's Bundesbank said last week it would only contribute if non-euro zone and non-European countries did too and commitments are not clear.
German Finance Minister Wolfgang Schaeuble saw little chance of the United States increasing its contribution to the Fund to help Europe, and there doubts whether Britain will take part.
"Washington cannot make bilateral loans available to the IMF without Congress approving it ... and there's no chance of that and the American government has always made that clear," Schaeuble told German radio.
Even with the year-end looming there is no let-up in the scramble to ease market pressure on euro zone strugglers.
The European Central Bank will offer three-year funds to banks for the first time on Wednesday, an effort to counter the freeze in interbank lending. France hopes banks will use the money to buy euro zone bonds but with banks under pressure to reduce risk and rebuild capital that may be a vain hope.
Market response to measures agreed at a Dec. 9 EU summit has been cool, mainly because of the reluctance of the ECB to step up euro zone bond purchases and declare its readiness to do so.
As a result, ratings agency Fitch concluded on Friday that a 'comprehensive solution' to the crisis was technically and politically beyond reach. It warned that six euro zone economies, including Italy and Spain, could be hit with credit downgrades in the near future.
Standard & Poor's has said it could soon downgrade nearly all the euro zone's 17 members.
ECB President Mario Draghi began two hours of testimony to the European Parliament at 1530 GMT.
He told the Financial Times that the ECB could not start printing money and gave no signal that it would buy euro zone government bonds more aggressively.
Speaking at a ceremony in Rome, Italian President Giorgio Napolitano called for a "strengthening of the still insufficient firewalls" necessary to defend sovereign debt and the euro.
RETICENT ECB
Spain's incoming Prime Minister Mariano Rajoy promised deep cuts in public administration spending to meet tough deficit targets while offering tax breaks for companies in his first speech before parliament on Monday.
His first three reforms would concentrate on budget stability, completing a banking sector restructuring process and structural reforms in the public sector.
"We are confronting enormous difficulties and must make very demanding efforts," Rajoy told Parliament.
Italy's austerity budget, vital to Rome's attempts to get its accounts in order and do its part to try to save the euro from collapse, enters its final stretch this week with unions still on the warpath.
But given doubts about the IMF getting more money and the fact the euro zone's rescue funds have taken so long to set up, investor focus remains overwhelmingly pinned on the ECB.
"We believe the resolution of the euro debt crisis will remain the principal theme in 2012. All other themes are likely to be derivatives of the crisis," Deutsche Bank analysts Mark Wall and Gilles Moec said in a note. "We see greater ECB involvement as inevitable. Very easy monetary policy for longer is also likely."
The central bank, which is forbidden by EU law from directly financing government deficits, welcomed the Dec. 9 agreement on more fiscal discipline in the euro zone, but doused expectations it would ramp up sovereign debt buying in return.
Euro zone policymakers said the ECB's role in the crisis was impossible to communicate clearly because of legal and political constraints. But they said the bank would not, in the end, allow the crisis to threaten the survival of the currency bloc.
A declaration from the ECB that it would buy unlimited amounts of euro zone bonds for as long as necessary would immediately calm markets, but would probably break EU law and would relax pressure on politicians to reform their economies.
"The ECB simply can't and won't say that, and it's very unreasonable to even expect it," one euro zone official said.
Instead, the bank was likely to keep quietly buying enough Spanish and Italian bonds to keep both countries on the market but with financing costs sufficiently high to keep pressure on their lawmakers to pursue tough reforms.
"This is the most expensive approach, also not likely to work in the longer run, but still it is the only one possible," the euro zone official said.
Euro zone leaders agreed on Dec. 9 to write into national constitutions a rule that budgets have to be balanced or in surplus in structural terms. If they are not, automatic corrective measures would follow.
Such rules would sharply limit government borrowing, bring down debt and, euro zone politicians hope, help restore market trust in the sustainability of public finances.
But constitutional changes will take a year or more and markets want reassurance now that money invested in euro zone debt is safe, especially after banks were asked to accept a 50 percent loss on their Greek bonds in October as part of a second bailout of the country which sparked the debt crisis.
To address market concerns that they do not have enough money to prevent the crisis from engulfing Italy and Spain, euro zone leaders brought forward by one year to July 2012 the launch of their 500 billion euro permanent bailout fund, the ESM.
Leaders will decide in March if the combined lending capacity of the temporary fund, the 440 billion euro European Financial Stability Fund (EFSF), and the ESM, should be capped at 500 billion euros, or raised by the amount already spent by the EFSF.
Draghi said politicians needed to move fast to make the EFSF operational. He declined to give a clear answer whether the ECB would keep buying government bonds once it was up and running.