Euro zone IMF loan target in danger as UK declines help

Euro zone
ministers agreed on Monday to boost IMF resources by 150 billion euros
to ward off the debt crisis and won support for more money from EU
allies, but it was unclear if the bloc would reach its 200 billion euro
target after Britain bowed out.

Following a three-hour conference call, European Union finance ministers said currency zone outsiders the Czech Republic, Denmark,
Poland and Sweden would also grant loans to the International Monetary
Fund to help save the 17-nation zone.

But
the EU said those lenders must first win parliamentary approval, while
Britain made it clear it would not participate in the plan.

That leaves the euro zone more reliant than ever on major economies such China and on Russia, which has shown willingness to lend more to the IMF. The
United States for its part is concerned about the lender’s exposure to
the euro zone.

Ministers had set an
informal deadline of Monday to arrive at the 200 billion figure, which
was agreed by EU leaders at a summit on December 8-9. and urged other
nations to take part.

“Euro area
member states will provide 150 billion euros of additional resources
through bilateral loans to the fund’s general resources account,” the EU
finance ministers said in a joint statement after their call.

“The
EU would welcome G20 members and other financially strong IMF members
to support the efforts to safeguard global financial stability by
contributing to the increase in IMF resources,” the statement said.

British
Treasury sources said Britain had decided not to contribute to an
increase IMF resources. “We were clear that we would not be making a
contribution,” one Treasury source said, while another added that there
was “no agreement on the 200 billion” euro funding boost.

The
EU was more diplomatic, however, saying in its statement that London
would take a decision on the issue early in the new year in the
framework of the Group of 20 economies.

The
increase in IMF resources is seen as one pillar in a multi-pronged
strategy to strengthen the euro zone’s fire-fighting capability and
build better defenses for the future. Another pillar is making the euro
zone’s existing bailout fund, the EFSF, more flexible in how it tackles
the debt debacle.

NEW YEAR PRESSURES

Speaking
during testimony to the European Parliament, ECB President Mario Draghi
praised EU efforts to forge a new ‘fiscal compact’ as a solid base for
responding to the crisis, and called the euro an “irreversible” project.

“I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility,” he said.

“You
have a lot of people, especially outside the euro area, who really
spend a lot of time in what I think is morbid speculation, namely, what
happens if? And they all have catastrophic scenarios for the euro area.”

But he said bond market pressure on the euro zone would be “very significant” in the first quarter, with some 230 billion
euros of bank bonds, up to 300 billion in government bonds, and more
than 200 billion euros in collateralized debt all maturing.

“The pressure that bond markets will be experiencing is really very, very significant, if not unprecedented,” he said.

Draghi
spoke while EU ministers were still on their conference call, with
discussions also looking at issues surrounding the euro zone’s permanent
bailout fund, with Finland unhappy about plans to weaken the unanimity
rule governing how the European Stability Mechanism is run.

Finland’s
opposition, if not overcome, could scupper efforts to bring the ESM
into force in July 2012, a year earlier than planned, to step up
crisis-fighting efforts.

But the
primary focus of debate was about the increase in IMF resources, with
concerns growing that the EFSF is insufficient to handle the debt
problems and with too long to wait until the permanent mechanism is up
and running.

While EU leaders
agreed at their last summit on the desire to boost IMF resources, there
are doubts about whether the scheme will work, with not just London and
Washington unenthusiastic, but Germany’s Bundesbank too.

“Washington
cannot make bilateral loans available to the IMF without Congress
approving it,” German Finance Minister Wolfgang Schaeuble told German
radio. “There’s no chance of that and the American government has always
made that clear.”

With the year-end looming, there is no let-up in the scramble to try to ease market pressure on euro zone stragglers, such as Italy and Spain, while those countries also set about implementing ever-tighter budget controls.

The
ECB will offer three-year funds to banks for the first time on
Wednesday, an effort to counter the freeze in interbank lending. France hopes banks will use the money to buy euro zone bonds but with banks
under pressure to reduce risk and rebuild capital that may be a vain
hope.

Market response to measures
agreed at the December summit has been cool, mainly because of the
reluctance of the ECB to step up bond purchases and declare its
readiness to do so.

As a result,
ratings agency Fitch concluded on Friday that a ‘comprehensive solution’
to the crisis was technically and politically beyond reach. It warned
that six euro zone economies, including Italy and Spain, could be hit
with credit downgrades in the near future.

Standard & Poor’s has said it could soon downgrade nearly all the euro zone’s 17 members.

RAJOY’S PROMISES

Speaking
in Rome, Italian President Giorgio Napolitano called for a
“strengthening of the still insufficient firewalls” necessary to defend
sovereign debt and the euro.

Spain’s
incoming prime minister, Mariano Rajoy, promised deep cuts in public
administration spending to meet tough deficit targets while offering tax
breaks for companies in his first speech before parliament on Monday.

His
first three reforms would concentrate on budget stability, completing a
banking sector restructuring process and structural reforms in the
public sector.

“We are confronting enormous difficulties and must make very demanding efforts,” Rajoy told Parliament.

Italy’s
austerity budget, vital to Rome’s attempts to get its accounts in order
and do its part to try to save the euro from collapse, enters its final
stretch this week with unions still on the warpath.

But
given doubts about the IMF getting more money and the fact the euro
zone’s rescue funds have taken so long to set up, investors’ focus
remains overwhelmingly pinned on the ECB.

“We
believe the resolution of the euro debt crisis will remain the
principal theme in 2012. All other themes are likely to be derivatives
of the crisis,” Deutsche Bank analysts Mark Wall and Gilles Moec said in
a note. “We see greater ECB involvement as inevitable. Very easy
monetary policy for longer is also likely.”

Euro
zone policymakers said the ECB’s role in the crisis was impossible to
communicate clearly because of legal and political constraints. But they
said the bank would not allow the crisis to threaten the survival of
the currency bloc.

A declaration
from the ECB that it would buy unlimited amounts of euro zone bonds for
as long as necessary would immediately calm markets, but would probably
break EU law and would relax pressure on politicians to reform their
economies.

Instead, the bank was
likely to keep quietly buying enough Spanish and Italian bonds to keep
both countries on the market but with financing costs sufficiently high
to keep pressure on their lawmakers to pursue tough reforms.