IMF WARNING:EUROPEAN LEADERS face a "1930s moment" unless they agree an even bigger bailout fund, further fiscal integration and a joint euro bond, according to the International Monetary Fund.
As EU finance ministers debated the terms and financing of the European Stability Mechanism (ESM) yesterday, IMF managing director Christine Lagarde indicated it was doomed from the start unless its lending capacity was increased significantly.
“Without this countries like Italy and Spain, fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs,” she said.
IMF officials have suggested that a doubling of the €500 billion lending capacity may be required.
The timing and location of Ms Lagarde’s speech yesterday was no accident: after talks with Chancellor Angela Merkel she warned the world was waiting for leadership from Germany “and it is in Germany’s core interest to provide such a role”.
Berlin has long resisted a further increase in the ESM funding capacity; finance minister Wolfgang Schäuble said on Sunday there were no plans to increase its capacity “for the moment”.
Ms Lagarde, however, warned there was no time for prevarication, calling for a “clear and credible” timetable for the folding of the temporary bailout fund – the European Financial Stability Facility – into the ESM.
Ms Lagarde also urged the European Central Bank to provide further stabilising funding to banks and sovereign debt markets.
The former French economics minister said euro zone crisis measures to date, while individually impressive, remained piecemeal and lacked an overarching crisis-fighting structure.
To break a vicious circle of banks and sovereign states hurting each other, Ms Lagarde called for a “pan-euro facility” to take stakes in troubled banks.
In addition, she argued it was “not tenable” for 17 fiscal policies to continue to exist side by side in one monetary policy.
“The area needs some form of fiscal risk-sharing, which would allow for common support before economic dislocation in one country develops into a costly fiscal and financial crisis for the entire euro area.”
The IMF viewed several options positively, such as a common eurobond or a “debt redemption fund”, proposed by German economists, where low-interest euro loans would be linked to a fixed repayment plan.
“Political agreement on a joint bond to underpin risk-sharing would help convince markets of the future viability of European economic and monetary union,” said Ms Lagarde at the German Council on Foreign Relations think tank.
She argued the greatest danger facing the world was not a lack of cash but a “lack of collective determination” to avail of opportunities to solve the economic crisis.
The IMF’s global economic outlook, to be released today, shows growth stalling this year.
