Eurozone may ask IMF for more help as crisis deepens
Growing pressure on ECB to provide emergency financial support for Italy is set to be opposed by the Bundesbank
Published 30/11/2011 | 05:00
EUROZONE ministers struggled to ramp up the firepower of their rescue fund and are set to ask the IMF for more help after Italy's borrowing costs hit a stunning high of nearly 8pc yesterday.
Two years into Europe 's sovereign-debt crisis, investors are fleeing the eurozone bond market; European banks are dumping government debt; deposits are draining from south European banks; and a looming recession is aggravating the pain, fuelling doubts about the survival of the single currency.
There was some progress at a meeting of eurozone finance ministers last night, but it is well short of the hoped for breakthrough. Ministers signed off on a deal to pay out an €8bn loan to Greece next month, which at least pushes out the threat of financial collapse in that country.
They also signed up to measures aimed at boosting or "leveraging" the European Financial Stability Facility (EFSF), according to Luxembourg's Jean Claude Junker, who leads the group of euro-area finance ministers.
Ministers agreed that the EFSF will be able to help countries to borrow by providing an insurance scheme on bond losses, and will be allowed to partner with outside investors.
Eurozone leaders had hoped that this would leverage the €250bn spare capacity of the rescue fund four- or five-fold to more than €1,000bn.
But last night Klaus Regling, head of the EFSF, conceded that a sharp deterioration in market conditions over the past month means that the final firepower of the fund will fall well short of the target.
He refused to say how much he now hopes to raise, but Europe is planning to turn to the IMF to make up the difference and discussions were taking place in Brussels last night to look at options, including by funneling European Central Bank (ECB) loans via the IMF to struggling countries.
ECB financial support for Italy via the IMF would require a massive policy U-turn by the central bank and would run into fierce opposition from Germany's Bundesbank.
The ECB is wary about relaxing the pressure on Rome for fiscal and structural reforms.
"We will discuss with the ECB. The ECB is an independent institution, so we will put on the table some proposals and after that it is for the ECB to take the decision," Belgian Finance Minister Didier Reynders said.
The ECB failed for the first time since May to fully offset €203.5bn in eurozone government bond purchases, adding to fears that the debt crisis is ratcheting up stress on the bloc's banking sector.
Lending to the IMF would allow the ECB to overcome the legal restrictions placed on its bond-buying programme, which hitherto has been strictly interpreted by Germany. As well as tapping credit lines from the ECB via the IMF, ministers will also assess some other options to boost the EFSF.
One option is to permit it to swap any sovereign bonds it purchases for loans from commercial banks, which in turn would be able to use the assets as collateral for ECB liquidity.
The complex structure would significantly increase the EFSF's firepower. But it carries big risks and would be reliant on ECB approval and participation, which are far from certain.