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IMF to Call on EU for Increase in Bailout Fund, Bond Purchases

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The International Monetary Fund (IMF) will urge governments in the euro zone to increase the size of their rescue fund, and will also call for additional purchases of bonds by the European Central Bank (ECB).

According to a Reuters report, Dominique Strauss-Kahn, chief of the IMF, will present a report from that organization to euro zone finance ministers on Monday in Brussels. The report characterizes the current worries about contagion within the euro zone as “a severe downside risk,” and calls for more action from nations within the zone.

Currently, the rescue facility, set up in May by the IMF and EU, has 750 billion euros ($998 billion). However, when the bailout of Ireland last week failed to soothe the worries of the markets, and the spotlight turned first to Portugal and then to a lesser degree to Spain and even Italy, the facility began to be seen as perhaps inadequate to the challenge.

The IMF’s report also calls for expanding the ECB’s bond purchase program, as well as taking additional measures. The pressure is on for member nations to do more to stem the tide of investor fears. Jean-Claude Trichet, president of the ECB, has said that member nations must not put all their reliance on the bank to solve the euro zone’s problems; he has urged them to take additional substantial actions. On Saturday, Belgian Finance Minister Didier Reynders also encouraged member nations to contribute further to the facility’s funding.

Germany is in the center of the turmoil; it is thought that Chancellor Angela Merkel’s call for investors to share in any losses was a major contributing factor to last week’s market woes. The German government has said it sees no reason to increase the rescue facility. However, Berlin may be under further pressure to ante up if investors are still spooked on Monday. If Portugal and perhaps Spain need assistance, the rescue facility’s current funding level will be tested.

But Merkel has expressed concern that German taxpayers will be reluctant to keep paying for bailouts; in fact, German Finance Minister Wolfgang Schaeuble has warned that there is a need to take seriously the rise of ananti-euro party. Reuters reported that among German academics and on some Internet forums the idea of that nation leaving the euro has taken hold, and in a recent poll a majority of Germans said the country would have been better off with the deutschmark instead of the euro.

Adding to the unease surrounding Germany, on Saturday Berlin denied a report that Merkel had threatened Germany’s exit from the euro during an October meeting with other euro zone leaders. A British newspaper quoted her as saying during a heated discussion with Greek Prime Minister George Papandreou, “If this is the sort of club the euro is becoming, perhaps Germany should leave.”

Steffen Seibert, Merkel’s spokesman, denied she made any such comment, reiterating the German government’s commitment to the euro. And Guido Westerwelle, the nation’s foreign minister, said to the Berliner Zeitung that Germany’s prosperity was tied to the euro.


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