G-20 Boosts IMF Firewall, Pressures Germany

Eurozone crisis focus shifts to Spain as Greece tries to form government

The ECB headquarters in Frankfurt. (Photo: AP) The ECB headquarters in Frankfurt. (Photo: AP)

At the summit meeting of G-20 leaders in Los Cabos, Mexico, the focus was on strengthening the firewall of the International Monetary Fund (IMF) and pushing Germany to relent on pooled debt and increasing deficit spending.

After its Sunday election, Greece watched as the leader of the winning New Democracy party, Antonis Samaras, worked to form a coalition government, and the focus of the eurozone crisis turned to Spain, where borrowing costs set records.

Bloomberg reported that a draft document from the G-20 meeting addressed that body’s resolve to contain the crisis. The unreleased draft was quoted in the report saying in part that eurozone G-20 members “will take all necessary policy measures to safeguard the integrity and stability of the area, improve financial markets and break the feedback loop between sovereigns and banks.”

One of those measures is the bolstering of the rescue fund at the IMF. Emerging-market countries increased the amounts they had pledged to the firewall, nearly doubling the fund to $456 billion. Christine Lagarde, managing director of the IMF, said in a statement that China, Brazil, Mexico, India and Russia had announced additional contributions to the IMF’s rescue fund to strengthen a “second line of defense.” Other countries pledging to add to the total, albeit in smaller amounts, were South Africa, Colombia, Malaysia, New Zealand and the Philippines.

According to the official Xinhua News Agency, China has committed to contribute $43 billion. The other countries have said they will each kick in $10 billion. The action was taken over concerns that the present level of the firewall is inadequate to cope with the eurozone crisis.

At the summit, Prime Minister Manmohan Singh of India was quoted saying, “There is concern that the firewall available may not be adequate to deal with contagion. The resources currently expected to be mobilized by Europe and the IMF are less than was estimated a year ago, and the crisis is actually more serious.”

Lael Brainard, chief international negotiator at the Treasury Department, was quoted saying that Europe was working to “break the feedback loop” between banks and government debt that is increasing the pressure on Spain’s financial crisis. In the report, she said, “We’re seeing a notable shift in European discussion” toward a focus on economic growth and “laying out a path to financial union.”

Germany is still resisting any additional move toward closer political and fiscal union, despite the pressure by other countries, although such measures are planned as part of the discussion by EU leaders at a summit in Brussels to be held June 28-29. Although Reuters reported that Chancellor Angela Merkel of Germany has agreed to consider a more integrated banking system, she still opposes any sort of joint euro debt.

Leaders will have to take some sort of substantial action, and quickly, if they hope to contain the crisis. On Tuesday Spain paid a record euro-era price on its short-term debt, which rose about 200 basis points on 12-month Treasury bills and 18-month paper compared to the last auction a month ago for the same types of securities. This was despite a coming bailout for the country’s banking sector.

At the G-20, Spanish Economy Minister Luis de Guindos blamed markets, not the country’s banking system, for its current plight. "We think ... that the way markets are penalizing Spain today does not reflect the efforts we have made or the growth potential of the economy," he said in the report. "Spain is a solvent country and a country which has a capacity to grow."

Harvinder Sian, a rate strategist at London-based RBS, was quoted saying before Tuesday's debt auction, "It looks as though the market's broken now. I don't think there's anything the Spanish can do to bring it back. I don't think the ECB can bring it back ... [a full sovereign bailout for Spain] is inevitable."

He added, "With the [G20] summit not looking like it will produce anything particularly dramatic to help in the crisis situation, I think the market's made its statement. There has to be a change in the way the Europeans are attacking the crisis."

Meanwhile, Greece faces the challenge of forming a new government with a leader at the helm known more for his divisive tactics in the past than an ability to compromise and get people to work together. Antonis Samaras of the New Democracy party is saddled with the task of putting together a governing coalition among the parties that emerged from Sunday’s election.

His job will not be an easy one. Samaras himself rejected Greece’s first bailout in 2010, and has previously opposed austerity measures; now he finds himself their chief advocate against Alexis Tsipras, whose Syriza party won second place in the election and who firmly opposes the terms of the second bailout. Tsipras has refused to join any governing coalition and instead has promised to continue to oppose the terms of the bailout.

Fears over Tsipras’ possible emergence from the election as the winner had led to a softening among eurozone leaders concerning austerity measures for Greece, and indeed the possibility continues that some concessions will be made to allow Greece more time to comply with budget cuts and other measures it has agreed to.

Although Germany continues to oppose any such concessions, an unnamed eurozone official said in a Reuters report that the terms of Greece’s bailout package earlier this year were "changeable" and could be "adapted," but there were different opinions in the eurozone and in Greece on the scope of such changes.

Although the U.S. supports a review of the terms, Merkel herself was quoted saying at the G20 meeting, “The important thing is that the new government sticks with the commitments that have been made. There can be no loosening on these reform steps.”

Still, in an AP report, another unnamed EU official who requested anonymity was quoted saying Tuesday that Greece’s bailout would be renegotiated because the escalating eurozone crisis had made the old agreement an "illusion." While he said that the goal would still be to lessen Greece’s level of debt and make its economy competitive, he added that how that was to be accomplished would be a matter for discussion.

Riccardo Barbieri, chief European economist at Mizuho International in London, said in the report that eurozone countries should give Greece more time to meet its goals, adding that it would help gain support in the country for the changes Athens must make to revamp its economy and return to growth.

He was quoted saying, “The stress testing of the next Greek coalition would be a very bad idea. Europe must throw Samaras a bone. There needs to be a compromise.”

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