Members of the Group of 20 advanced and developing economies plan to renew pressure on Europeans in the coming days to expand their Continent-wide bailout funds quickly, despite the latest rescue deal for Greece.
Finance ministers and central bankers from the world’s leading economic powers convening in Mexico City this weekend are expected to discuss an effort by the International Monetary Fund, announced last month, to more than double its lending capacity to almost $1 trillion.
But officials from outside Europe will insist again that euro-zone nations put more of their own money on the table first, to build a larger financial firewall to guard against new trouble, including a spike in borrowing costs for struggling nations such as Italy and Spain.
“What is going to matter most for restoring market confidence, for establishing market credibility, is that signal of commitment by euro-area members to defend the euro area,” U.S. Treasury Under Secretary for International Affairs Lael Brainard said Wednesday.
A strong firewall funded by Europe would “provide assurances that sovereigns who are undertaking reforms will be able to finance themselves at sustainable rates,” she said.
The relatively calm mood in markets could reduce the impetus to act quickly. The European Central Bank’s recent moves to provide cheap loans to banks has eased pressure on the European financial system and on Italy and Spain.
Officials around the world remain concerned that any missteps in Europe could trigger a new bout of financial turmoil. Trouble with a private-sector bond exchange in Greece, or fresh political resistance inside euro-zone nations, could renew market fears.
“There is a misperception in some quarters that this has become a less urgent matter,” said Domenico Lombardi, a Brookings Institution economist and former IMF board member. “They would really squander an opportunity. This is the right moment to try to erect a credible firewall and prevent a sudden escalation of the euro-area crisis that might spill over to the global financial system.”
European leaders plan to discuss in early March whether to combine money in a temporary bailout facility with a permanent rescue fund set to come online this summer. Together, that could provide about €750 billion ($993 billion) in a fund that could be used if members of the 17-nation currency bloc need more financial support.
The largest euro-zone member, Germany, has resisted proposals to combine the rescue funds. European leaders are set to discuss the effort at their own meeting next week, at a time when some also will need to win approval from their parliaments for Greece’s latest bailout.
The next steps in Europe mean the IMF fund-raising effort likely won’t find traction until the fund’s spring meeting in April, or the gathering of G-20 leaders in June. If investors remain relatively relaxed about European risks, the talk of building a larger firewall by euro-zone countries or by the IMF could drag on even longer.
Still, the IMF plans to keep its fund-raising effort alive. Last month, IMF staff told the fund’s board that vulnerable nations around the world could need $2 trillion in emergency loans over the next two years because of weakness in the global economy emanating from Europe’s financial turmoil.
IMF Managing Director Christine Lagarde told European officials half of that money should come through Europe’s own rescue funds. The other half would need to come from the IMF.
The fund today has almost $400 billion in available resources and wants to increase that by $500 billion. European nations already have pledged about $200 billion in new money for the IMF from their national central banks.
Ms. Lagarde has met with major IMF shareholders, from China to Saudi Arabia, to win support for her fundraising effort. She is moving forward despite misgivings from some IMF members, including the U.S., who have warned that the prospect of IMF money could reduce pressure on European policy makers to raise more money themselves.
The U.S., the largest shareholder in the IMF, doesn’t plan to contribute to the IMF fundraising this year. U.S. officials have said repeatedly that Europe has the resources to fund its own rescue effort.