EU to resist IMF calls to enlarge rescue fund

EU LEADERS plan to face down demands from the International Monetary Fund (IMF) and top central bankers to enlarge the rescue net for euro countries when they meet in Brussels on Thursday to sign off on a change to the Lisbon Treaty to create a permanent bailout fund.

In defiance of market turbulence and increased sovereign bond purchases by the European Central Bank (ECB), the leaders aim to avoid taking any other new measures when they agree on narrow revision of the treaty.

Still at issue in talks on the change to the treaty is a British push for the proposed amendment to specifically rule out any drawdown from the EU budget, as seen in the European Commission’s contribution to Ireland’s rescue. A source said, however, that there was little appetite among other countries for such a reference.

As market demand for weaker sovereign debt dries up before traders close their books for year-end accounts, participants in the talks believe demand will improve in the new year as investors seek a profit margin by acquiring bonds with premium yields.

However, fresh evidence of the waning confidence in weaker sovereigns emerged yesterday when the ECB disclosed it increased its sovereign bond purchases last week. The ECB said it completed €2.67 billion of purchases after settling €1.97 billion the previous week, which, at the time, was its biggest intervention for 22 weeks.

Several options to strengthen the existing rescue regime are on the table, but well-placed diplomats say there is reluctance to take immediate action because that could signal a sense of alarm to investors.

Such options include downgrading the triple-A rating of the €440 billion European Financial Stability Facility (EFSF) to increase its borrowing capacity and giving it the power to buy sovereign bonds on secondary markets, akin to the policy adopted in May by the ECB.

Manoeuvres along those lines are under examination but the analysis is not yet complete, said two sources briefed on what are described as “open-ended” discussions. “The other things are for the most part purely theoretical speculations, but are not ready yet for political decisions because of the fact that we are very keen to be very careful not to give any unnecessary signal to the markets. The dossier is not ready,” said a diplomat with direct knowledge of the talks.

The IMF and German Bundesbank chief Axel Weber have called for the EFSF to be increased, and ECB chief Jean-Claude Trichet has hinted that it would be a good idea. However, various sources say there is reluctance to take that step at this time because German chancellor Angela Merkel could not do so without parliamentary approval.

With less than 10 per cent of the EFSF deployed in Ireland’s EU-IMF rescue, sources say it is widely acknowledged it would be exceptionally difficult if not impossible for Dr Merkel to win parliamentary approval in the absence of any immediate crisis.