Britain refuses to contribute to €200bn euro zone rescue
European finance ministers look unlikely to reach a target of boosting IMF resources by €200 billion to ward off the debt crisis today, after Britain confirmed it would not take part in a plan aimed specifically at helping the euro zone.
In a three-hour conference call, ministers also assessed plans for tighter euro zone fiscal rules - a new 'fiscal compact' - that policymakers hope will insulate the 17-country currency zone against a repeat of the two-year debt crisis.
Treasury sources said Britain had made it clear on the call it would not participate in the plan to increase IMF resources by up to €200 billion.
"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" funding boost.
While Sweden said it would take part, with conditions, Britain's decision to stay on the sidelines means it is unlikely the headline goal will be reached. Ministers had set an informal deadline of today to arrive at the €200 billion figure, which was agreed by EU leaders at a summit earlier this month.
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 defences 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.
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."
On the EU drive for tighter fiscal rules, he said: "Enshrining strict rules in primary legislation, making them enforceable by the European Court of Justice: all of this should contribute to making public finances in the euro area credibly robust. The ECB welcomes this outcome."
Mr Draghi spoke as EU ministers were still locked on their conference call, with discussions also set to examine 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 euro zone's temporary bailout mechanism, 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 Britain unenthusiastic, but the United States and 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 European Central Bank 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 Ireland, could be hit with credit downgrades in the near future.
Standard &a Poor's has said it could soon downgrade nearly all the euro zone's 17 members.
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 today.
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.
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.
"The ECB simply can't and won't say that, and it's very unreasonable to even expect it," one euro zone official said.
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.
"This is the most expensive approach, also not likely to work in the longer run, but still it is the only one possible," the euro zone official said.
Euro zone leaders agreed on December 9th to write into national constitutions a rule that budgets have to be balanced or in surplus in structural terms. If they are not, automatic corrective measures would follow.
Such rules would sharply limit government borrowing, bring down debt and, euro zone politicians hope, help restore market trust in the sustainability of public finances.