Lagarde leads global push for reinforced bailout fund

 

International Monetary Fund managing director Christine Lagarde led a global push today for the euro zone to boost its financial firewall, saying "if it is big enough it will not get used".

Ms Lagarde, supported by British chancellor George Osborne, said the IMF could boost its support for the euro zone but pressed its leaders to act first.

"Now is the time - there has been a lot of pressure building in order to see a solution come about," Ms Lagarde told a panel discussion at the World Economic Forum at Davos on the economic outlook from which euro zone leaders - most notably Germany - were conspicuously absent.

Countries beyond the 17 euro zone want to see member states provide more money before they commit additional resources to the IMF, which this month requested an additional €500 billion in funding.

"It is critical that the euro zone members develop a clear, simple firewall that can operate both to limit the contagion and to provide this sort of act of trust in the euro zone, so that the financing needs of that zone can actually be met," she said.

Ms Lagarde's comments rounded out a crescendo of calls at the Davos for the euro zone to boost its financial defences.

The annual conference began with German chancellor Angela Merkel deflecting pressure to do so. In a carefully worded keynote address, Ms Merkel suggested doubling or even tripling the size of the fund may convince markets for a time, but warned that if Germany made a promise that could not be kept, "then Europe is really vulnerable”.

Yesterday US treasury secretary Timothy Geithner pressed Europe to make a "bigger commitment" to boosting its firewall.

Two bankers who attended meetings with Mr Geithner at Davos said the US was looking for the euro zone to roughly double the size of its firewall to €1.5 trillion. There was no immediate comment from the US Treasury.

Mr Osborne said the currency bloc must beef up its firewall before other countries increase their funding to the IMF.

"I think the euro zone leaders understand that," said Mr Osborne, the only European minister at today's panel discussion on the global economic outlook in 2012.

"There are not going to be further contributions from G20 countries, Britain included, unless we see the colour of their money," he added, calling for the euro zone "to provide a significant increase in available resources".

Japanese Economics Minister Motohisa Furukawa echoed Mr Osborne's comments, saying: "Without the firm action of Europe, I don't think the developing countries like China or others are willing to pay more money for the IMF.

"On condition that the euro zone boosts its own defences, he said Japan and other countries were willing to additional support via the IMF.

Ms Lagarde said, however, that if the international lender's resources were boosted sufficiently, this would raise confidence to such a degree that they would not be needed.

"If it is big enough, it will not get used. And the same applies to the euro firewall for that matter," she added.

However, economist Nouriel Roubini was more downbeat and described the euro zone as a “slow-motion train wreck”.

Mr Roubini said he expected Greece, and possibly Portugal, to exit the euro zone within the next 12 months and believed there is a 50 per cent chance of it breaking up completely in the next 3-5 years.

Reuters