Only ECB has power to ‘scare’ global stock markets, warns IMF

Brussels has until November’s G20 summit to work out how best to turn the €440bn bailout fund into €2tn war chest The International Monetary Fund has warned that the immense firepower of the European Central Bank (ECB) would be needed to “scare” the financial markets and prevent an intensification of the turmoil threatening to send the global economy back into recession. With investors poised to give their verdict tomorrow on the weekend talks in Washington of finance ministers and central bank governors, European policymakers insisted that fresh moves to scale up the fighting fund to support struggling members of the single currency were in the offing. Brussels has a deadline of the Cannes G20 summit in early November to flesh out its proposals but is waiting for a key vote in the German parliament this week on the expansion of the European Financial Stability Facility (EFSF) before deciding how best to turn the €440bn (£380bn) pot of capital into a €2tn war chest. “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 said. Some European countries, including Germany, are sceptical about using the ECB to provide the leverage but the International Monetary Fund (IMF) insisted there was no alternative. Antonio Borges, head of the IMF’s European division, said: “It is very important that we see a combination of the ECB and the EFSF. Anyone who thinks that the EFSF will be a miraculous solution to the problem is making a very big mistake. “The ECB is the only agent which can really scare the markets.” Privately, many officials at the IMF and in its 187 member governments accept the inevitability of a Greek default and now see the priority as preventing the two much bigger economies of Italy and Spain being dragged down. Greece’s finance minister, Evangelos Venizelos, said Greece would not default before talks with the IMF about the next €8bn instalment of its rescue package due next month. Sources in Washington said Greece would get the money in the hope that Europe would buy itself enough time to piece together a convincing anti-contagion strategy. The likeliest time of a Greek default is thought to be in late 2011 or early 2012. Prices of shares and commodities plunged last week as dealers took fright at Europe’s intensifying debt crisis and signs of a marked slowdown in the world economy. The managing director of the IMF, Christine Lagarde, said the world was in a “very dangerous place” while the president of the World Bank, Robert Zoellick, said there was a risk of the contagion spreading to emerging economies, which have been performing more strongly than the rich western nations. “The numbers emerging out of developing countries over the past month are shaking and shaky,” Zoellick said. European policymakers in Washington responded to the pressure put on them by the US, Britain and emerging country members of the G20 group. Brazil’s finance minister, Alexandre Tombini, said his country’s experience showed the need to act with “overwhelming force”, while Tim Geithner, the US treasury secretary, said: “Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe.” Justine Greening, economic secretary to the Treasury, said Britain had been urging Europe to get to grips with the crisis for several weeks. “I think we’ve had some positive steps taken this weekend towards the eurozone being able to do that in terms of both recapitalising the banks in Europe that are under stress but also [by] putting in place a bailout fund that is big enough to give confidence to the markets,” she said. Olli Rehn, Europe’s commissioner for economic and financial affairs, said the eurozone needed to do more. “We need to build a bridge and I think this bridge will be developed on the basis of the current reform of the EFSF and as one part of that next stage we are contemplating the possibility of leveraging the EFSF resources to have more firepower and thus have a stronger financial firewall to support our member states doing the right thing.” One option to increase the potency of the EFSF currently under discussion would be for the ECB to commit large amounts of funding, with the capital in the EFSF used to cover potential losses. German finance minister, Wolfgang Schäuble, said he was open to the idea of leveraging Europe’s rescue fund but said that did not necessarily mean the ECB should provide the extra firepower. Mohamed el-Erian, co-chief investment officer of the giant bond fund Pimco, said: “It is encouraging that … European officials are signalling a better appreciation of the depth and potential consequences of the crisis. “Now they need to translate this into decisive actions underpinned by a common vision of what they want the eurozone to look like in five years’ time.” European debt crisis European banks Europe European Central Bank IMF Economics Global economy Stock markets Financial crisis Global recession Banking G20 Market turmoil Timothy Geithner Larry Elliott guardian.co.uk

Posted by on September 25, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.