Saturday

10th Dec 2022

EU to channel €150bn to IMF for its own rescue

  • Germany does not want the future fund to run in parallel with the current one (Photo: Stephanie Jones)

EU leaders are discussing an increase of Europe's contribution to the International Monetary Fund by €150 billion, which in turn could be used to rescue troubled euro-countries.

Central banks in the 17 states of the eurozone may increase their contribution to the IMF by a total of €150 billion, a senior EU official told reporters in Brussels under condition of anonymity. Another €50 billion may come from other non-eurozone countries, the source added.

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Half the sum would go to troubled eurozone countries while the other €100 billion would be made available to rescue programmes all around the world.

The IMF solution is intended circumvent opposition from Germany and the European Central Bank to the latter intervening directly to assist countries such as Italy and Spain, the third and fourth largest economies in the euro area.

Speaking to reporters on his way into the meeting, Swedish Prime Minister Fredrik Reinfeldt said his country - a non-euro member - is "absolutely" in favour of the IMF solution, because markets have "huge confidence" in the well-established financial institution. "It should be part of the solution, alongside the eurozone rescue mechanisms (EFSF/ESM)," he added.

Danish leader Helle Thorning-Schmidt told EUobserver that her country, which also lies outside the single currency, will contribute 40 billion kroner, or €5.3 billion, to the IMF as well. She said her government had already told the national central bank to be ready. "For us it is a gesture. We want to show we take our responsibility seriously," the prime minister said.

Leaders at the two-day summit are also trying to overcome German resistance to lifting a €500 billion cap on lending from the existing and future bail-out funds for the eurozone. Berlin has agreed to advancing by one year the bigger and permanent bail-out fund (ESM), which should have come into being mid-2013, but is adamantly opposed to the fund being awarded a banking licence. "We think that would be going in a completely wrong direction," one senior German official told media on Wednesday.

The official confirmed that talks on how to boost the IMF's lending power were ongoing, but dampened expectations that a deal would be reached over the weekend.

The legal wrangling about about a possible EU treaty change demanded by Germany on deficit sanctions and rules have somewhat overshadowed ongoing talks on how best to use bail-out mechanisms and the IMF in saving the euro.

Efforts to boost the current bail-out fund, the European Financial Stability Facility, a €440 billion "patchwork of loan guarantees" as the German official put it, flopped last month after EU leaders failed to attract the hoped-for scale of investment from countries such China and Brazil.

The permanent fund (ESM), agreed upon last year when it became clear that the EFSF was insufficient, is still pending ratification in all 17 eurozone countries - a process leaders hope to fast-track.

But the Slovak experience, with its government collapsing earlier this year over the ratification of the law just enabling the ESM to be set up, indicates what hurdles still lay ahead.

ECB cuts rates, defies expectations

As EU leaders headed into a crunch summit, the European Central Bank cut interest rates and introduced a range of measures to aid Europe’s troubled banking system, but defied hopes that the institution would aggressively expand its government bond-buying programme.

The ECB unveiled a quarter-point cut to its rate, down to one percent.

As banks have increasingly been closed off from funding from each other and other sources, the sector has become addicted to liquidity provided by the central bank. However, fears have grown that they may be reaching the limit of what they can provide as collateral.

Responding to the problem, the ECB has now relaxed what it will accept as collateral against loans to banks.

In another move intended to ease the pressure on the sector, the ECB reduced the ratio of deposits the banks must park with national central banks from two percent to one percent.

However, the bank made no moves to boost its purchase of government debt in Italy and Spain, a development bank chief Mario Draghi hinted at last week when speaking the European Parliament.

Separately, the European Banking Authority announced the results of a fresh round of stress tests of the continent’s financial institutions, declaring that some 30 banks across 12 countries out of 71 tested, must recapitalise themselves to the tune of €114.7 billion by next June.

Spanish banks - hit by the worst funding shortfalls - must fill gaps totalling €26.2 billion, followed by Italian banks, which must plug a hole of €15.4 billion.

In Germany meanwhile, banks face a gap of €13.1 billion, a substantial increase on the €5 billion shortfall the EBA estimated in October.

EU looking to new €940bn bail-out fund

The EU's troubled bail-out fund, the EFSF, could have its lending capacity more than doubled to €940 billion to reassure markets that Italian and Spanish debt is safe.

EU states fail to cobble together €200bn for IMF

Eurozone countries on Monday agreed to pay €150bn to a special IMF fund but failed to reach their total ceiling of 200bn among all EU states, as pledged on 9 December, with Britain refusing to contribute to the euro-saving scheme.

IMF euro rescue starts to unravel

Days after leaders pledged to channel €200bn through the IMF to help rescue the eurozone, the German central bank, the Czech Republic and Estonia have come out against the idea. Japan, Canada and the US are also sending negative signals.

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