Monday, January 23, 2012

Lagarde urges EU to increase financial firewall against Greek crisis

IMF chief Christine Lagarde urged today European governments to increase their financial firewall to prevent Greece's troubles from ensnaring bigger countries like Italy and Spain.

She also called on European leaders to complement the "fiscal compact" they agreed last month with some form of financial risk-sharing, mentioning euro zone bonds or bills, or a debt redemption fund as possible options.

Berlin opposes those steps and Merkel told a news conference with the Belgian prime minister that it was not the time to debate an increase in the euro zone's bailout funds - the European Financial Stability Facility (EFSF) and its successor, the 500 billion euro European Stability Mechanism (ESM).

"I don't think it is right to do one new thing then do another, let's get the ESM working," Merkel said, reiterating that Germany was prepared to accelerate the flow of capital into the ESM ahead of its planned introduction in mid-2012.

Italian Prime Minister Mario Monti, who has complained openly that his reform efforts have not been recognized by the markets, is reportedly pushing for the rescue fund to be doubled to 1 trillion euros. Lagarde stopped short of advocating that, saying: "I am not saying double it."

The more immediate worry is Greece. Without the second bailout from the euro zone and the International Monetary Fund, Athens will not be able to pay back 14.5 billion euros in maturing bonds in March, triggering a messy default that would hurt the entire euro zone and send tremors beyond the 13-year old single currency bloc.

Euro zone leaders agreed in October that the second bailout would total 130 billion euros, if private bondholders forgave half of what Greece owes them in nominal terms. But Greek economic prospects have deteriorated since then, which means either euro zone governments or investors will have to contribute more than thought.

After dealing with Greece, euro zone ministers will choose a replacement for European Central Bank Board member Jose Manuel Gonzales Paramo, whose term ends in May. The 17 ministers of the euro zone will then be joined by 10 ministers from the other European Union countries to finalize a treaty setting up the euro zone's permanent bailout fund, the ESM.

The 27 EU finance ministers will also prepare the final draft of another treaty to sharply tighten fiscal discipline in the euro zone, called the "fiscal compact," that is designed to ensure another sovereign debt crisis cannot happen in future.