A European proposal to channel central bank loans through the IMF might deliver as much as 200 billion euros (US$270 billion) to fight the debt crisis, two people familiar with the negotiations said.
At a meeting on Tuesday attended by European Central Bank (ECB) President Mario Draghi, eurozone finance ministers gave the go-ahead for the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as an effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.
Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said.
“We’re looking for a maximum reinforcement with the IMF and the central bank,” Belgian Finance Minister Didier Reynders told reporters on Wednesday.
No fewer than four “comprehensive” rescue packages over 19 months have failed to arrest the crisis, fueling speculation that a currency designed to last forever might break up unless European leaders forge a more united economy. Central bank loans might be linked to an adoption of tougher budget policing by governments and tighter economic ties.
The eurozone’s 17 national central banks operate under the ECB’s umbrella. Draghi on Thursday hinted at a stepped-up crisis-fighting role as long as governments move toward a “fiscal compact” that ensures healthy public finances.
German Chancellor Angela Merkel laid out elements of that strategy on Friday, calling for European treaty amendments to create automatic, court-enforced sanctions on countries that overstep limits of 3 percent of GDP on deficits and 60 percent of GDP on debt.
For governments in rich countries such as Germany that are unwilling to lend more to high-debt states, the IMF idea would unlock funds without violating European rules that bar central banks from offering direct budget financing, the people said.
Spokesmen for the ECB and Bundesbank declined to comment.
“The IMF will need more resources should the crisis deepen further,” IMF spokesman Gerry Rice said in a statement on Friday. “Such loans could indeed come from member country central banks, and indeed these central banks are already lending to the fund under the New Arrangements to Borrow and bilateral agreements signed since 2009.”
“It is an easy solution because bilateral loans coming from the central banks, they haven’t to ask for money from the taxpayer,” EU President Herman Van Rompuy said in Brussels on Thursday. “But we are exploring these avenues. It depends also on the amount of money we can raise.”
News of the possible IMF lending channel boosted the shared currency.
The euro rose as much as 0.7 percent before erasing the gain on a disappointing US jobs report.
It slid 0.2 percent to US$1.3431 at 11am in New York on Friday, paring its advance for the week to 1.4 percent.
“For the first time during the protracted euro crisis, a number of factors have emerged that provide hope that Europe may still come out of it, if not unscathed, at least alive,” said Alessandro Leipold, a former acting director of the IMF’s European department who is now chief economist of the Brussels-based Lisbon Council. “The moment is fleeting and it will have to be seized decisively.”
Bonds of Italy and Spain rose on Friday amid optimism that European leaders would piece together a tighter fiscal framework at a summit on Thursday and Friday that would prompt the greater central bank commitment.
One option is the lending via the IMF, which specializes in aid programs and has about US$390 billion available to lend.
The sums being discussed by finance officials range from 100 billion euros to 200 billion euros, the people said.
The IMF has ample resources, said the official, who declined to be identified as a condition for holding the briefing.
“If we could see the proposed combination of IMF and ECB action, obviously that would be very, very credible to the market,” Swedish Finance Minister Anders Borg said on Wednesday.
Two broad channels are under consideration, the people said. Under the first option, the European money would go into an IMF trust fund earmarked for troubled euro states.
Under the second, the loans would be plowed into the IMF’s general resources.
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