Tue, Apr 17, 2012 - Page 10 News List

Europe eyes bigger IMF war chest on fears over Spain

Bloomberg and AFP, PARIS

European officials are scheduled to travel to Washington this week, seeking a bigger global war chest to combat the debt crisis as Spain’s government battles to quell renewed market turmoil over its finances.

Three weeks after European leaders unveiled emergency eurozone funding that exceeded the symbolic US$1 trillion mark, concerns about Spain’s position have ratcheted the nation’s borrowing costs to the highest levels this year.

Crisis-fighting resources will dominate talks at the IMF’s spring meeting in Washington which is scheduled to run from Friday until Sunday.

While the US insists that Europe can overcome the crisis using its own financial firepower, eurozone officials said they have done enough to trigger additional global assistance. The urgency was underscored last week when Spanish and Italian yields jumped, challenging assumptions among the region’s leaders that the worst of the fallout was behind them.

“After three months that were calmer than expected, the euro crisis is back,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The speed of the recent surge in yields has elements of a renewed market panic.”

The interest rate which Spain has to pay to borrow rose above 6 percent in early trading on the eurozone bond market yesterday.

The yield on Spanish 10-year debt bonds rose to 6.094 percent from 5.960 percent at the close of trading on Friday.

The surge in borrowing costs prompted Spanish Deputy Minister of Economy and Finance Jaime Garcia-Legaz to call on the European Central Bank (ECB) to resume its direct intervention in the markets.

While ECB member Benoit Coeure signaled on April 11 that the bank might buy up Spanish bonds, his Dutch colleague Klaas Knot said two days later that the bank was “very far” from reactivating the measure.

Spanish Prime Minister Mariano Rajoy, who is pushing through an austerity agenda targeting spending on health and education, won backing from his party’s regional leaders at the weekend. People’s Party chiefs from regions, including Madrid, Valencia and Galicia, agreed to streamline bureaucracy and write deficit targets into budget laws.

Rajoy’s government has struggled to convince investors after last month saying it would not meet budget deficit targets set by the European Commission and the previous government.

European governments are banking on a bigger safety net to soothe markets as the crisis continues to simmer, with Spanish borrowing nearing the level that prompted Greece, Ireland and Portugal to seek bailouts. Sentiment will be gauged again on Thursday when Spain auctions two and 10-year debt.

The Europeans’ appeal for funds could find more success after IMF Managing Director Christine Lagarde last week scaled back her request for US$600 billion in new contributions.

Lagarde said on Thursday last week that she is hoping to make “real progress” at this week’s meetings. She has also said the IMF needs more cash to quell economic risks separate from Europe’s woes, such as higher oil prices and slowing US growth.

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