WRAPUP 1-US rejects plan to strengthen IMF in euro zone crisis

11:11 PM crisis, rejects, strengthen, WRAPUP No Comments

 PARIS — Proposals to double the size of the IMF as part of a broader international response to Europe's debt crisis ran into resistance from the United States and others on Friday, burying the idea for now and putting the onus firmly back on Europe.

The outlines of the plan, that had the backing of several developing economies, emerged as G20 finance ministers and central bankers began meeting in Paris to discuss a world economy under threat from European nations mired in debt.

One G20 source said emerging market policymakers backed injecting some $350 billion into the International Monetary Fund.

U.S. Treasury Secretary Timothy Geithner and his Canadian and Australian counterparts poured cold water on the idea. The IMF's dominant shareholders, including the United States, Japan, Germany and China, are content that the fund's $380 billion worth of resources is enough.

"They (the IMF) have very substantial resources that are uncommitted," Geithner said.

German Finance Minister Wolfgang Schaeuble agreed the euro zone debt crisis was for Europe to solve, and expressed confidence that EU leaders would produce a plan at an Oct. 23 summit that would be convincing for financial markets.

The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the two-year-old debt crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.

"The first priority here is for Europeans to put their own house in order," Australian Finance Minister Wayne Swan said.

Canadian Finance Minister Jim Flaherty also said the G20 should keep up pressure on the euro zone on its "arduous" journey towards a solution and not focus on IMF resources.

If minds needed concentrating further, the downgrade of Spain's credit rating a few hours earlier highlighted the risk of a much larger economy than Greece coming under threat.

Standard and Poor's cut Spain's long-term credit rating, citing the country's high unemployment, tightening credit and high private sector debt.

French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for the European Union summit.

Fears about the damage a default by Greece -- and possibly others -- could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.

Unlike in 2009 when the G20 launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe's slow response while Washington and Beijing are sparring over the yuan currency.

The Franco-German crisis plan is likely to ask banks to accept bigger losses on their Greek debt than the 21 percent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.

"It will be more, that's more or less certain," French Finance Minister Francois Baroin said.

It should also lay out a system for recapitalising banks and plans to leverage the euro zone's 440 billion euros European Financial Stability Facility to give it more punch.

Schaeuble said European banks should be helped, if necessary, with state means to strengthen their capital.

Japanese Finance Minister Jun Azumi said he would share with his G20 counterparts Japan's "bitter experience" of failing to contain its 1990s banking crisis by doing too little, too late.

Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.

The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that. Attention has turned to the idea of making the fund more like an insurer.

For example, if the EFSF covered the first 20 percent of losses a bank could suffer in case of a default -- it could multiply its firepower fivefold to over 2 trillion euros.

The G20 may refer to the euro crisis in its communique and in closing news conferences on Saturday evening, but little else of substance is likely to be inked in with the EU summit in nine day's time the make-or-break moment.

G20 sources said most BRICS economies were in favour of bolstering the IMF's capital as a crisis-fighting tool.

"We have said this before and have conveyed this again, that if emerging economies and the BRICS are called upon to contribute, we can do it via the International Monetary Fund," one of the sources said. "India is open to it, China and Brazil are also okay with the idea."

Another G20 source said the IMF would present a plan which had broad support to its executive board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises. It could aid euro zone countries hit by the current crisis of confidence in the bloc's sovereign debt.

Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a Nov. 3-4 summit in Cannes, where France passes the G20 baton to Mexico.

A French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.

"We are going to try to make some progress and obtain, perhaps not tomorrow or Saturday but by Cannes, a list of measures country by country," he said. "These must be measures which will have an impact on the real economy."

A separate G20 source said after preparatory talks late on Thursday that China would commit to boost its consumption through a five-year plan, via households and companies as well as infrastructure.

The G20 countries make up 85 percent of global output.

An April G20 meeting placed seven large economies under review -- the debt-burdened United States, export driven China and the economies of France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process.

A G20 official said China would not commit to a quick liberalisation of its yuan currency to help rebalance global growth, but would offer to use expansionary fiscal policy to fuel domestic demand.

"No, they were pretty firm on that -- there will be no progress," the official said.

Copyright 2011 Thomson Reuters.

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Slovakia's parliament rejects euro bailout

11:46 AM bailout, parliament, rejects, Slovakias No Comments

BRATISLAVA, Slovakia  — Slovakia's Parliament rejected a key euro bailout bill Tuesday, threatening Europe-wide efforts to ease a debt crisis that is threatening the global economy. The vote triggered the collapse of the government, but the outgoing prime minister and her main opponent both said they would now work to approve the bill quickly.

The agreement to talk came shortly after Parliament voted against an expanded euro bailout fund — a vote that Prime Minister Iveta Radicova had tied to a confidence measure. Parliament is scheduled to convene again Thursday, but it is not clear when another vote will be held.

The eyes of officials and investors around the world are on the small central European country because expanding the fund requires the approval of all 17 countries that use the euro currency. Sixteen countries have already approved, and now Slovakia, with a population of just 5.5 million people, holds in its hands the fate the financial plans of the wider 17-nation eurozone and its 332 million citizens — and by extension, the global economy.

But the statements of the country's leading politicians late Tuesday left little doubt the Slovakian Parliament would approve the measure.

"We decided that we have to do it as soon as possible," Radicova said after announcing her party would hold talks with the primary opposition party, Smer-Social Democracy, led by former Prime Minister Robert Fico.

Fico took the same line. "Slovakia has to approve the fund," he said.

Fico and his party had always supported expanding the fund expansion in principle, but had said it would vote yes only if the government agreed to call early elections.

Although approval of the measure seems likely, the drama and brinkmanship highlighted what has become a major issue in Europe's debt saga: In a system where unanimity is required, even small countries wield great power.

Because major eurozone policies need the approval of all 17 countries that use the currency, Slovakia's vote — the last — carried immense weight. For weeks it appeared certain it would reject boosting the bailout fund, unnerving financial markets and threatening the future of Europe's plans to fight the crisis.

Experts said EU officials could possibly find a way around a Slovakian rejection of the bill to boost the powers and size of the bailout fund, the European Financial Stability Facility, or ESFS — but that doing so would carry costs to European unity.

In the longer-term, the drama seems sure to add momentum to the push for nimbler rules to govern the 17-country eurozone, where government reaction to the unfolding crisis has seemed for many months to be behind the curve.

That push has been gathering momentum for some time.

In August, the leaders of France and Germany, President Nicolas Sarkozy and Chancellor Angela Merkel, proposed that the heads of the eurozone countries elect the president of a new "economic government" who would direct regular summits to respond to the continent's financial crisis.

And in September, Jose Manuel Barroso. the president of the European Commission — the European Union's executive arm — decried what he called "the constraint of unanimity."

"The pace of our joint endeavor cannot be dictated by the slowest," Barroso told the European Parliament.

At issue now is an agreement reached by the eurozone leaders in July 21 to enlarge the EFSF's capital guarantee from euro440 billion to euro780 billion. Slovakia would contribute about 1 percent, or euro7.7 billion. In addition, if the changes are approved, the facility would have new powers and able to prop up government bond markets and help put new capital reserves against losses in banks.

Although 16 countries have given the thumbs-up, approval of the changes has found itself in potential jeopardy because of the opposition of a junior member of Slovakia's governing coalition, the Freedom and Solidarity Party. The party's chairman, Richard Sulik, calls the expanded bailout fund "a road to hell" and has vowed to block it.

While the need for unanimity can render decision-making in the eurozone slow and cumbersome, it does not mean that nothing ever gets done. In the end it usually does.

For example, Ireland's government fell shortly after it signed up to stringent austerity measures in return for a bailout. But the new government eventually embraced the bailout deal — even after having campaigned against it.

And when Finland's new parliament threatened to block rescue loans to Portugal, officials patched together a list of conditions that allowed lawmakers to approve the loan and save face at the same time.

That list of conditions led to a monthslong fight over a Finnish request for collateral. But even that dispute was eventually resolved through compromise.

And the Slovak parliament now seems likely approve expanding the stability facility in the end, as well. While unanimity is necessary, the pressure that can be brought to bear on recalcitrant leaders is huge.

But the acrimonious disputes and threats of vetoes diminish the confidence of the markets and citizens, many of whom no longer seem to believe that the EU has the will to protect them from a worsening economic crisis.

The euro cannot flourish in a system where 17 largely sovereign countries need to agree unanimously and very small countries can hold great sway, Simon Tilford, chief economist at the London-based Center for European Reform, said Tuesday.

"Either they integrate much more fully or the whole thing comes apart," Tilford said.

© 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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