Governments committed more than $400 billion in fresh money to the International Monetary Fund to help it protect the world economy against deepening debt turmoil in Europe.
That sum is contained in the draft of a statement obtained by Bloomberg News which will be released by Group of 20 finance ministers and central bankers after a meeting now under way in Washington. Specific country contributions will be decided ahead of a Mexican summit of G-20 leaders in June, Brazilian Finance Minister Guido Mantega said.
The near-doubling of the fund’s lending capacity is being coupled with warnings that it doesn’t absolve Europe of the need to intensify its own efforts to end a crisis now in its third year and which is still threatening global growth.
“Volatility remains high partly reflecting financial market pressures in Europe and downside risks still persist,” the G-20’s draft statement said.
Underscoring the need to reassure investors that euro-area nations can restore fiscal order without derailing their economies, Spain’s 10-year bond yield today passed 6 percent for the first time in four days. Almost two years since Greece was rescued, the concern remains that more bailout cash doesn’t cure debt strains and may still not be enough to insulate Italy.
A bigger IMF war chest is “an added plus for the euro zone as it would complement its own firewall,” said Christian Schulz, an economist at Berenberg Bank in London. “But if Italy were to get into trouble it still wouldn’t be enough to defend it.”
Draft Statement
In the draft statement, the G-20 said signs “point to a continuation of a modest global recovery” and that recent “tail risks” have begun to recede. The latest draft is a revision of one late yesterday in which officials cited the “situation in Europe” first in a list of drags on the world economy, which it then said faced renewed stress.
“Growth expectations for 2012 remain moderate,” the group of rich and emerging economies said in the new draft.
The officials promised to be “vigilant” of high oil prices and stood ready to act if needed, while welcoming promises by crude producers to ensure adequate supply, according to the draft. Crude for May delivery today rose $1.55, or 1.5 percent, to $103.82 a barrel at 11:26 a.m. on the New York Mercantile Exchange.
Own Defenses
Finance chiefs said Europe should do more to raise its own defenses and meet the often conflicting goals of cutting budget deficits, supporting economic growth and shoring up banks. That lobbying came almost a month since Europe boosted its own firewall to 800 billion euros, meeting a condition for more overseas assistance.
“They need to build up a firewall with their own resources more than they have done so far,” Canadian Finance Minister Jim Flaherty said in an interview yesterday.
The second replenishing of the IMF’s crisis-fighting coffers in three years isn’t coming without a fight and falls short of Managing Director Christine Lagarde’s initial goal of $600 billion. The lending capacity will be lower than the total amount raised because the IMF must keep some cash on hand.
Negotiations have taken five months and the U.S has balked at providing extra funding in an election-year, arguing the IMF has enough and that Europe can do more. Canada also refuses and proposes non-European nations wield a veto at the fund over future aid for Europe. Brazil is holding back as it demands greater power for emerging markets at the IMF.
Making Contributions
Of those making contributions public, euro-area nations have pledged the most with about 150 billion euros ($200 billion) followed by Japan’s $60 billion. The IMF’s current lending capacity is about $380 billion and the G-20 said in its draft statement that the new reserves are available for all 188 members and won’t be earmarked.
European officials in Washington defended their policy steps as they hoped a reinforcing of the IMF will placate investors.
“We can tell the world with full conviction that the Europeans have met their commitments,” German Finance Minister Wolfgang Schaeuble said. “We’re on a good track. The crisis of confidence in the financial markets with a view to the euro region hasn’t been fully overcome yet, but the substantial decisions have been taken.”
Spain in Trouble
The crisis has flared again with Spain’s benchmark yield jumping about 1 percentage point since early March as Prime Minister Mariano Rajoy struggles to meet budget deficit targets. Even with larger rescue funds, countries still face the need for austerity with the risk that spending cuts and tax increase could drive their debts even higher by harming growth.
Voters are set to have their say. France holds its presidential election in two days with Socialist candidate Francois Hollande leading incumbent Nicolas Sarkozy in the polls. Greece, whose budget math triggered the crisis, has a general election on May 6.
“The problem is not yet over and it’s primarily a problem about an absence of growth and the fact that with an absence of growth the fiscal numbers don’t really add up,” Stephen King, chief economist at HSBC Holdings Plc, told Bloomberg Television’s “Countdown” with Owen Thomas.
Source: Bloomberg