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.”