THE COLLECTIVE will of the world’s finance ministers at their annual IMF meeting in Washington to “do whatever is necessary” to stabilise financial markets should be welcome on world stock exchanges today, albeit it’s a somewhat unspecific pledge. But the real message from the meeting from the US, China, and the Bric countries alike, fearful of Greek default and the undercapitalisation by an IMF-estimated €200 billion of European banks, was spelled out bluntly by Brazilian finance minister Guido Mantega on Saturday: “It is the responsibility of European policy makers to ensure that their actions stop contagion beyond the euro periphery.” Europe “needs to act swiftly and boldly.
He has reason. Contagion is a fact – Brazil was forced last week to intervene to slow sudden drops in its own currency. And US treasury secretary Timothy Geithner spoke of failure in apocalyptic terms: “Cascading default, bank runs and catastrophic risk.” The threat “must be taken off the table . . . [or] it will undermine all other efforts, both within Europe and globally” to keep a lukewarm recovery from slipping into recession.
Euro zone officials emphasised that their focus is on putting the July 21st agreement on new money for Greece and a broadening of the scope of the European Financial Stability Facility (EFSF) into action. But they also hinted strongly privately that even France and Germany now accept the need to go further and are working on a major package for the November meeting of the G20 finance ministers. Whether markets will wait that long is another matter. As the IMF’s new boss, Christine Lagarde, made clear, “time is of the essence”.
In a G-20 statement on Thursday, key euro zone countries vowed to “maximise” the €440 billion EFSF. And EU monetary affairs commissioner Olli Rehn, spoke on Saturday of an “increasing political will” among European leaders for a plan to leverage the financial impact of the fund so that it could instead insure a few trillion euro in loans. “We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet,” one senior European official told Reuters.
It will not be easy, not least because parliamentary ratification even of the July deal in the member states is far from guaranteed. And German finance minister Wolfgang Schäuble said that while he was open to the idea of leveraging Europe’s rescue fund he said that did not necessarily mean the ECB should provide the extra firepower. Within the ECB there are clearly also doubts, as Irish member of the governing council, Patrick Honohan, made clear in Washington over the weekend, “We should not think of leveraging a public pot of funds as a free lunch.”
Meanwhile, in a mirror image on a global scale of the ramping up of euro zone borrowing capacity, the IMF said on Saturday it would decide by April whether its own resources are sufficient to prevent a global credit crunch. A more-than-doubling of its lending capacity of some $390 billion is being considered. European experience would suggest that may not be nearly enough.