Tags: Europe | G20 | IMF | Role

Europe Faces Pressure as G-20 Mulls IMF Role

Friday, 24 Feb 2012 10:15 AM

The U.S., Chinese and Japanese officials say they will press euro-area countries to do more to merit outside help when the world’s largest economies gather tomorrow for a meeting dominated by Europe’s sovereign-debt woes just days after Greece secured a second bailout.

European officials will push other Group of 20 nations to commit fresh cash to the International Monetary Fund to help defuse the region’s fiscal crisis, while the Obama administration says Europe now must first strengthen its firewall to prevent debts of countries such as Italy and Portugal from becoming unsustainable.

G-20 finance ministers and central bank governors meet in Mexico City four days after the European Union sanctioned a 130 billion-euro ($170 billion) rescue for Greece and amid warnings by the IMF that concerns about debt sustainability could drag the world into another recession. While China, Japan, Brazil and the Mexican hosts say they are willing to help once Europe acts, the U.S. shows no signs of reaching for its checkbook.

“Europe will implicitly be the main political topic of conversation, in the lens of what will it take to get more contribution to the IMF,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “The Europeans clearly realize that they have to move first.”

U.S. Position

With demand from the European Union’s 500 million consumers slowing, China and Japan have signaled a commitment to help resolve Europe’s debt woes. The condition is that Europe “make more efforts to create a bigger firewall,” Japanese Finance Minister Jun Azumi said Feb. 20 in Beijing. Japan is considering contributing $50 billion to the IMF’s European rescue package, the Asahi newspaper reported Feb. 23, without saying where it obtained the information.

The U.S. administration “has been clear with our international partners that we are not seeking additional funding for the IMF,” Lael Brainard, the Treasury’s undersecretary for international affairs, told U.S. lawmakers this month. The U.S. wants “additional steps” to be taken by Europe “to strengthen the firewall,” Jay Carney, White House press secretary, told reporters in Washington Feb. 21.

European Funds

IMF Managing Director Christine Lagarde, who was French finance minister when the crisis surfaced in Greece in late 2009, is looking for an additional $500 billion in lending resources for the Washington-based fund. The 17 euro nations have pledged about $200 billion in new money.

European leaders will meet again in Brussels March 1-2 to review the mechanics of the 500 billion-euro permanent rescue fund, the European Stability Mechanism. The fund, which is to be implemented in July, one year earlier than originally planned, was set up to aid European Union member states that need help meeting debt payments.

While some officials and the European Central Bank favor combining the permanent fund with the temporary European Financial Stability Facility to produce a 750 billion-euro firewall, Germany has yet to show its hand and is calling for more IMF help to increase funds available to contain the crisis.

Too Early?

G-20 leaders meeting in the French resort of Cannes in November put off a decision on increasing aid to Europe. Mexican Finance Minister Jose Antonio Meade said Feb. 8 it’s still too soon to expect a deal on additional IMF funding. This weekend’s meeting will lay the ground work for a G-20 heads of state summit to take place in June in the Mexican resort of Los Cabos.

“There’s a generalized recognition that having more resources available via the IMF might be something that people are prepared to sign up to provided they feel that Europe is doing enough to help itself,” Malcolm Barr, chief U.K. economist at JPMorgan Chase & Co. in London, said in a phone interview. “But there is a clear sequence.”

Even with EU’s second bailout, investors see a 94 percent chance that Greece will default, according to CMA credit default swaps on Feb. 22. That same day Fitch Ratings lowered Greece’s credit grade by two levels to C from CCC, saying a default is “highly likely in the near term.”

A euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate Feb. 22, after economists surveyed by Bloomberg News had forecast a reading of 50.5. In contrast, the Manufacturing & Non-Manufacturing ISM Index, a gauge of manufacturing and non- manufacturing activity in the U.S., rose to 56.5 in January from 52.8 in the previous month.

World Bank Race

Stocks in Europe declined yesterday for a third day, as the European Commission said it expects the region’s economy to shrink this year. The Stoxx Europe 600 index lost 0.2 percent, eroding an 8 percent rally for the gauge this year. Commerzbank AG, Germany’s biggest lender, tumbled 6.6 percent after it and two other banks, Royal Bank of Scotland Group Plc and France’s Credit Agricole SA booked losses on their Greek government debt.

“There’s a nascent recovery in the U.S.,” said Sony Kapoor, managing director at Re-Define, a London-based firm that advises governments on economic policy. “The biggest risk factor in the global economy is the worsening of the euro crisis,” he said.

Aside from the firewall, policy makers will probably discuss a successor for World Bank President Robert Zoellick, who said last week he would step down when his five-year mandate ends June 30.

The World Bank board has said it expects to select his successor by its spring meetings that start April 20 in Washington, and will accept nominations until March 23.

A U.S. citizen traditionally holds the post under an informal agreement in which a European heads the IMF. While the U.S. has said it planned to nominate its candidate in coming weeks, officials from Brazil and China are pushing for a selection procedure that could yield a president who is not from the U.S.

“I’d be very surprised if you don’t see trial balloons being put forward,” Kirkegaard said. “This is exactly the right forum for the kind of informal discussions about that.”


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