Craig Eisele on …..

February 27, 2012

G20 Questions and EU on Bailout Funds Financing

Filed under: Uncategorized — Mr. Craig @ 8:00 am

G20 Questions and EU on Bailout Funds Financing

Leading economies told Europe it must put up extra money to fight its debt crisis if it wants more help from the rest of the world, piling pressure on Germany to drop its opposition to a bigger European bailout.

Euro zone countries pledged on Sunday at a Group of 20 meetings of finance leaders to reassess the strength of their bailout fund in March, which could clear the way for other G20 countries to contribute more funds to the International Monetary Fund.

“This will provide an essential input in our ongoing consideration to mobilize resources to the IMF,” the G20 said in the final communique of the two-day meeting of finance ministers and central bankers due to be released later on Sunday.

Germany, as Europe’s largest economy, came under intense pressure to support enlarging the region’s war chest. But facing political hurdles at home, it has sent conflicting signals over whether it was ready to move.

British finance minister George Osborne left no doubt the G20 requires a clear euro-zone commitment.

“We have to see the color of the eurozone’s money first – and, quite frankly, that hasn’t happened. Until it does, there’s no question of extra IMF money from Britain or probably anyone else,” he said.

The G20 is racing to line up massive international resources worth nearly $2 trillion – including existing and new funds – possibly by late April. That would help to draw a line under the financial crisis that erupted in 2008 when Lehman Brothers collapsed, spawned the deepest U.S. recession since the 1930s and now has engulfed Europe’s deeply indebted countries.

It would mark their boldest move since they ploughed $1 trillion into their economies three years ago to combat recession. Many advanced economies are still flooding markets with cheap money to combat weak growth and prevent financial contagion.

Yet the world economic recovery remains patchy and risks remain high that it could stumble, the G20 finance officials said in the communique.

Germany said it would make a decision sometime in March on strengthening Europe’s bailout fund.

The proposal is to combine Europe’s temporary and permanent bailout fund to create a 750 billion euro ($1 trillion) war chest. This would open the door for other G20 countries, like Japan and China, to meet the IMF’s request for $500-$600 billion in new resources, on top of its current $385 billion in funds.

Put together, this would total almost $2 trillion in firepower. The G20 finance chiefs next meet in Washington in late April and they showed they will not ease pressure on Europe by giving it a signal now that new IMF money is in the bag.

U.S. Treasury Secretary Timothy Geithner said on Saturday that Europe had come a long way in laying the foundations for a “credible” crisis response but could not rest there.

Germany, as Europe’s largest economy, came under intense pressure to support enlarging the region’s war chest. But facing political hurdles at home, it has sent conflicting signals over whether it was ready to move.

British finance minister George Osborne left no doubt that the G20 wants a clear euro-zone commitment.

Yet some progress has been made. U.S. Treasury Secretary Timothy Geithner said on Saturday that Europe had come a long way in laying the foundations for a “credible” crisis response but could not rest there.

“It’s important not to rest on that progress … That progress is in part based on expectations of more progress to come,” he said.

GERMANY ISOLATED

Germany is sending conflicting signals over whether it would give ground and agree to more European bailout money.

It has argued that toughened fiscal rules already adopted by Europe, which require highly indebted countries to slash their budget deficits, are far more important to restoring market confidence and reviving economic growth. It pointed to narrowing government bond spreads in recent weeks, a G20 official said.

Behind closed doors in Mexico City, Schaeuble appeared more conciliatory. Margrethe Vestager, economy minister of current EU president Denmark, on Saturday said that “even Germany” was reasonably happy to strengthen the bailout fund.

But then it fought in vain for weaker language in the communique, wanting to say that re-assessing the region’s financial firepower was “important” for getting more IMF funds, not “essential” as was finally agreed upon, G20 officials said.

And from Berlin, a government official close to Chancellor Angela Merkel insisted on Sunday there is already enough money pledged for the euro-zone’s rescue fund.

The United States and some emerging countries struggled to understand Germany’s position, another G20 official said.

“They find it difficult to understand the German obsession with fiscal discipline, so Germans were a bit isolated in the meeting and putting the blame on Merkel and on the Bundestag was a way for the German delegation to fight the criticism coming from non-EU countries,” one G20 official said.

The new, second Greek bailout package needs approval in Germany’s parliament. Lawmakers in the Bundestag lower house will vote on Monday. It is expected to pass with opposition support.

 

IMF REFORMS

Some developing economies have conditions of their own for giving more money to the IMF. Brazil’s finance minister said on Saturday that emerging markets wanted implementation of a 2010 reform that would give them more say at the Fund, as well as a bigger European rescue vehicle.

In the communique, the G20 reaffirmed it would stick to that pledge in time for its annual meeting in September.

The world’s leading economies also noted risks to growth from rising oil prices, which vaulted to a nearly 10-month high above $125 a barrel on Friday. The G20 welcomed pledges by oil producers to ensure adequate supply.

“It’s important not to rest on that progress … That progress is in part based on expectations of more progress to come,” he said.

* Europe told to put up more cash before G20 will help

* Stronger European firewall a precondition for extra IMF funds

* Pressure piled on Germany to back stronger European firewall

* Germany sends conflicting signals

* World economic recovery still patchy, risks remain high-G20

Following are comments from policymakers attending the meeting of Group of 20 finance ministers and central bankers in Mexico City on Sunday:

U.S. TREASURY SECRETARY TIMOTHY GEITHNER

ON EURO ZONE CRISIS

“The most important thing we’ve seen is the progress in Europe towards laying out a more credible foundation for stability.”

“I’m very encouraged by the impact so far of the combined actions of new governments in Italy and Spain doing a very good job of laying out reforms to meet their very formidable economic challenges.”

ON IMF RESOURCES

“I think you’re seeing a very welcome indication from the major shareholders of the IMF that they’ll do what is necessary to make sure the IMF continues to have the resources it needs to deal with the pressures emanating from Europe,”

“We will not go to Congress to seek the authority necessary for a contribution from the United States. We don’t think that’s necessary or desirable.”

ON EUROPEAN FIREWALL

“To be credible and to serve its intended purpose, a firewall has to be large relative to the plausible claims on those resources.”

CANADIAN FINANCE MINISTER JIM FLAHERTY, AFTER THE G20

MEETING:

“I’m a little bit more confident, modestly more confident, but there are still a lot of obstacles.”

GERMAN CENTRAL BANK PRESIDENT JENS WEIDMANN ON THE G20

MEETING AND RESULTS:

“We have made some progress in the different issues.”

“The conference was a typical working meeting to prepare the G20 summit in Los Cabos.”

BRAZILIAN CENTRAL BANK GOVERNOR ALEXANDRE TOMBINI

“The central bank has signalled recently of the high probability that the monetary policy rate in Brazil will be in single digits in the future. That strategy has not changed until today.”

“(The price of) oil is a worry for all central banks at this moment.”

GERMAN FINANCE MINISTER WOLFGANG SCHAEUBLE

“There is no diverging view that we’re on the right path with our stability measures.”

“I assume we’ll get the necessary approval for it (the Greek rescue package) on Monday in the Bundestag. We know that we still need the decision of the IMF board for this on the IMF’s contribution for a second programme for Greece. We appreciate the IMF’s contribution and I assume that we will also get the necessary support for it within the IMF.”

“As the heads of government have agreed, we will make our decision in Europe in the course of the month of March. But the month of March goes from March 1 to March 31. It will be reviewed again, also in the light of the developments that have since occurred, whether the stated dimension of the mechanism is enough or not. And it’s going to be in time for the IMF to be able to make a corresponding decision at the spring meeting in Washington on the firewall – not on the participation on the second Greece package.”

“For all of the decisions the German government has made in this context, it’s got the necessary approval in the German Bundestag. And so you can definitely assume that if the German government makes these decisions, it will get the necessary approval for them in the German Bundestag.”

BRITISH FINANCE MINISTER GEORGE OSBORNE

“We are prepared to consider IMF resources but only once we see the colour of the euro zone money and we have not seen the colour of the euro zone money,” Osborne told Sky TV. “I think that quid pro quo will be clearly established here in Mexico City.”

GERMAN CENTRAL BANK PRESIDENT JENS WEIDMANN

“The G20 meeting takes place in an economic environment in which, after a weak phase for the global economy, the indicators are improving again. In view of this, there is a chance that the relatively pessimistic IMF forecasts could be surpassed. This economic situation is true of the global economy as a whole but there are quite stark differences between individual countries, including within the euro zone.”

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