Tags: ECB | IMF | Eurozone | Rescue

Officials: ECB Could Lend to IMF for Eurozone Rescue

Thursday, 17 Nov 2011 10:27 AM

Eurozone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest eurozone sovereigns, officials said.

"Some discussions on this have taken place... It could be one way of getting around the legal restrictions on the ECB," one official with knowledge of the talks said. A second official said ECB lending to the IMF was being explored.

The idea appears as the rising severity of the eurozone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms.

Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the eurozone bailout fund EFSF to 1 trillion euros ($1.352 trillion) were unlikely to fully materialize or, even if they do, to be sufficient.

But EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to eurozone governments, which should first of all change policies that created large public debt and slow growth.

France has openly called for the ECB to get more involved by issuing the eurozone bailout fund — the European Financial Stability Facility (EFSF) — a banking license that would allow it to refinance itself with the ECB liquidity operations.

Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB's independence and in the end lead to higher inflation, which would make all eurozone citizens poorer.

ECB INDEPENDENT, BUT HELPING

Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any eurozone government, could achieve that, officials said.

"It is just an idea, at least for now," a eurozone official said.

Article 23 of the ECB statute says that "the ECB may conduct all types of banking transactions in relations with third countries and international organizations, including borrowing and lending operations."

The IMF could then use the ECB money to finance various rescue operations in the eurozone like bailouts, precautionary credit lines, on its own, or in cooperation with the EFSF.

"It is doable," a second eurozone official said. Two further eurozone officials said they had heard of the idea.

Money from the ECB to the IMF would also help alleviate criticism from non-eurozone IMF member countries that all of the fund's resources — which come from all IMF members — are being used up for the relatively rich eurozone.

To prevent a collapse of the eurozone debt market, the ECB has been buying government bonds on the secondary market, saying it was doing so to improve the transmission of its monetary policy, which highly volatile bond markets were distorting.

It has stressed however, that such purchases were limited in scope and were also temporary — a half-hearted approach in the eyes of the market.

While it may be designed to keep the pressure on governments to implement reforms, eurozone policymakers privately say it is also the costliest possible way of dealing with the crisis.

"If the ECB told the market it would buy eurozone bonds for as long as it takes, or up to some big limit, who in the market would want to test that? But if they do it bit by bit, markets keep coming back," a third eurozone official said.

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Eurozone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest eurozone sovereigns, officials said. Some discussions on this have...
ECB,IMF,Eurozone,Rescue
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2011-27-17
Thursday, 17 Nov 2011 10:27 AM
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