Euro Zone Falls Short of IMF Loan Target After U.K. Withholds Funding
Euro-zone leaders agreed Monday to channel 150 billion euros into the International Monetary Fund’s war chest, winning support for more money from non-euro allies, but it is unclear whether the bloc will ultimately reach its 200 billion-euro target after Britain failed to commit any funding.
After a three-hour conference call on Monday, European Union finance ministers announced that the Czech Republic, Denmark, Poland, and Sweden, none of which are in the euro, would grant loans to the IMF, while all 17 euro nations also pledged funds. But those lenders must first win parliamentary approval for the funds.
Britain, Europe’s second-largest economy, made it clear it would not participate in the plan, leaving the euro zone more reliant on major economies like China and Russia, which has signaled that it might lend more to the IMF.
Ministers had set Monday as an informal deadline to arrive at the 200 billion-euro target agreed to by EU leaders at a summit on December 8-9, and had urged non-euro countries to take part.
“The EU would welcome [Group of 20] members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources,” the finance ministers said in a joint statement after their call. They said that, while Britain had not decided to contribute to the IMF, London would make a decision on the issue early in the new year.
However, one British Treasury source said, “We were clear that we would not be making a contribution,” while another added that there was “no agreement on the 200 billion” euro funding boost.
EU ministers also discussed issues surrounding the euro zone’s permanent bailout fund in their conference call on Monday, with Finland concerned by plans to weaken the unanimity rule governing how the European Stability Mechanism is run. Finland’s opposition could prevent the ESM from coming into force as planned in July 2012.
With the European Financial Stability Facility’s resources insufficient to handle the euro zone’s debt problems and with the wait too long until the permanent mechanism is up and running, the primary focus on yesterday’s call was the increase in IMF resources, but though EU leaders agreed at their last summit to boost IMF funding, doubts about whether the scheme will work has shifted investors’ focus to the European Central Bank.
“We see greater ECB involvement as inevitable. Very easy monetary policy for longer is also likely,” Deutsche Bank analysts Mark Wall and Giles Moec said in a note.
ECB President Mario Draghi has gone on the record saying it does not fall withing the central bank’s mandate to step up government bond purchases. “The [EU] treaty specifies very closely what our remit is, namely [to] ensure price stability in the medium term,” Draghi said in testimony to the European Parliament on Monday. “The treaty also forbids monetary financing, and we want to act within the treaty,” as breaching the treaty “would also negatively effect the credibility of our institution.”
However, the ECB said it settled 3.36 billion euros of bond purchases last week, up from 635 million euros the previous week. And today, the Frankfurt-based central bank will begin offering banks unlimited three-year loans, lubricating the credit system with a flood of cash.
While euro-zone policymakers said they could not communicate clearly the ECB’s role in the crisis because of legal and political constraints, they did say the bank would not allow the crisis to threaten the survival of the single-currency bloc. But the ECB is unlikely to commit to buying unlimited amounts of euro-zone bonds for as long as necessary, as that would break EU law and relax pressure on politicians to reform their economies.
Instead, the bank will likely keep buying enough Spanish and Italian bonds to keep both countries on the market and keep borrowing costs from skyrocketing, while maintaining enough pressure on lawmakers for them to have to pursue tough reforms.