July 27, 2021

Lagarde Urges Europe to Beef Up Bailout Funds

“We need a larger firewall,” Christine Lagarde, managing director of the I.M.F., said at a conference in Berlin.

Governments should add “substantial real resources to what is currently available,” she said, by adding the remaining resources of the ad hoc bailout fund rolled out in 2010 — the €440 billion, or $567 billion, European Financial Stability Facility
— into a permanent fund — the €500 billion European Stability Mechanism
— that officials hope to unveil by the middle of this year.

Ms. Lagarde spoke hours before euro zone finance ministers and representatives from the European Central Bank were to meet in Brussels, with the roll-out of the E.S.M. on their agenda.

Ms. Lagarde suggested simply “identifying a clear and credible timetable” for making the new fund operational “would help greatly.”

Eurogroup officials also were to receive an update on Greece’s negotiations with its creditors to restructure its crushing debt.

After days of talks between Greek officials and private lenders, the French finance minister, François Baroin, said at a news conference in Paris on Monday that it appeared a deal was taking shape.

His Greek counterpart, Evangelos Venizelos, told reporters as he arrived in Brussels that Greece was ready to complete a private-sector debt swap “on time.”

While the sense of crisis has ebbed and markets have calmed since the E.C.B. last month unveiled longer-term refinancing operations to inject nearly €490 billion of liquidity into the banking system, analysts say the central bank has only bought time for leaders to put the 17-nation currency bloc on a firmer footing.

Ms. Lagarde said it was “essential” that the E.C.B. continue “to provide the necessary liquidity support to stabilize bank funding and sovereign debt markets.”

Without more such actions from governments and the central bank to convince financial markets, Ms. Lagarde said, “countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs. This would have disastrous implications for systemic stability.”

Greece’s talks with private-sector creditors have made significant progress, but have held up on the interest rate it will pay on restructured debt.

Private sector bondholders are seeking yields of near 4 percent, but Greece, as well as Germany and the I.M.F., argue that a yield closer to 3 percent is necessary to give the restructuring a serious hope of success. With the talks at an impasse, it is now up to finance ministers to come up with a solution.

The German chancellor, Angela Merkel, told reporters Monday that it was “high time to work on the new Greece program,” Bloomberg News reported from Berlin. “I expect that the negotiations with the private creditors and the new Greece program can be completed simultaneously and soon enough that no new bridge loan whatsoever will be needed,” Mrs. Merkel said.

The monthly Eurogroup meeting comes at a time of widespread gloom about the broad European economy. Austerity budgets in the euro zone are reducing demand and weighing on growth.

Even Germany, where factories are bustling, is feeling the effects. The Federal Statistical Office said last month that the German economy probably contracted by about 0.25 percent in the fourth quarter of 2011 from the prior three months.

The urgency of the problem was underscored Monday by economic data from Spain, which is struggling with an unemployment rate over 20 percent. The country will likely see its economy shrink by about 1.5 percent this year, after contracting by about by 0.3 percent in the last quarter of 2011, the Bank of Spain estimated
.

In Berlin, Ms. Lagarde questioned the wisdom of continuing down the path of extreme austerity at a time of economic weakness, noting that “several countries have no choice but to tighten public finances, sharply and quickly. But this is not true everywhere.”

In an apparent nod to Germany, which many economists say could help its neighbors by bolstering domestic demand, she noted: “There is a large core where fiscal adjustment can be more gradual. Automatic stabilizers, which let tax revenues fall and spending rise as the economy weakens, should certainly be allowed to operate. And those with fiscal space should support the common effort by reconsidering the pace of adjustment planned for this year.”

Ms. Lagarde also called for more fiscal integration among euro members, saying, “it is not tenable for 17 completely independent fiscal policies to sit alongside one monetary policy.” She called for new measures to increase the sharing of risk, including possibly jointly issued euro area debt instruments, or, as Germany has proposed, a debt redemption fund.

Ms. Lagarde said the I.M.F. had a role to play. “I am convinced that we must step up the Fund’s lending capacity,” to help defend “innocent bystanders” elsewhere in the world who are hurt by the euro contagion, she said. “A global world needs global firewalls.”

She reiterated her belief that the fund would need up to $1 trillion “in the coming years,” and it would need to raise $500 billion to bolster its lending resources.

James Kanter contributed reporting from Brussels and Landon Thomas Jr. from London.

Article source: http://feeds.nytimes.com/click.phdo?i=9d1bb9d12a72d084afbef33d778eb2ea

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