Thursday

26th May 2022

IMF: eurozone at centre of coming storm

  • IMF chief Christine Lagarde sees stormy times ahead (Photo: International Monetary Fund)

International Monetary Fund chief Christine Lagarde on Thursday (19 April) warned of "dark clouds" hanging over the global recovery, with the eurozone at the heart of the problem.

"We are seeing light recovery, blowing on the spring wind. But we are also seeing very dark clouds on the horizon," Lagarde said in a press conference in Washington.

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"The eurozone is the epicentre of potential risk," she warned.

Her comments come ahead of the IMF's spring meeting, which is to decide on increasing its own resources - part of which could also be used to fund further eurozone bail-outs.

Lagarde said she has already received pledges of over €240 billion out of its €300 billion goal - most of which would come from the eurozone countries themselves, the rest being committed by non-euro states such as Japan, Sweden, Poland, Denmark, Norway and Switzerland. The US has so far not put up any cash on top of its regular contribution.

As for Europe's own financial 'firewall' made up of a temporary and a permanent - yet non-existent - bail-out fund, Lagarde said EU governments have taken "significant steps in recent months" and made a "significant improvement of the firewall."

"There is a little bit missing here or there but is shows significant determination to defend their currency zone," she said.

The IMF had been advocating for a combined firepower of €1 trillion, but the only concession they could get from funding-reluctant donors led by Germany was to increase the two funds' joint ceiling to €700 billion, even though their actual lending power will be €500 billion.

Another suggestion coming from the former French finance minister is likely to fall on deaf ears in Berlin: to use the two bail-out funds for direct re-capitalisation of troubled banks, notably Spanish ones, which are running out of cash despite the recent €1 trillion in cheap loans offered by the European Central Bank (ECB).

The two funds "could actually help in terms of recapitalization anywhere in the eurozone," she said. "What we are advocating is that this be done without channelling through the sovereigns," she added, meaning that the funding should not go via governments.

A report issued by the IMF on Tuesday warned that eurozone banks are still at risk of a credit crunch, despite the ECB action. But Berlin is likely to reject this idea, as funding from the two bail-out funds needs parliamentary approval in Germany.

Pressure is likely to increase on Germany to agree to some sort of funding for Spanish banks, as the country's borrowing costs have starting rising again.

Its government is struggling with worsening economic conditions and even the IMF is now advocating less austerity so as not aggravate the situation.

In addition, Italy on Wednesday announced it will not be able to reach its deficit target of 1.7 percent of GDP this year and have zero deficit next year due to worse-than-expected recession.

The EU commission on Thursday downplayed the move and said it remains confident Italy will reach zero deficit next year and return to surplus as soon as possible, helping it to pay back some of Rome's massive debt. While

While Italy is also under the EU's so-called excessive deficit procedure, its public balance sheet is not as bad as Spain's. But its debt - 123 percent of GDP - is double the level set under eurozone rules.

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