Can Euro Log Jam Be Broken with Help from IMF? Will U.S. Go Along? (10/24)     Print Email

Too sensitive to be aired extensively in public, a potentially crucial element in this week’s “make-or-break” negotiations on the eurozone’s debt crisis is a possible buy-in by the International Monetary Fund.

The fund could marshal “firepower” for the eurozone against speculators by providing money to back up the European Financial and Stability Fund that is supposed to keep down the price of Italian and Spanish bonds in the wake of a partial default by Greece. (Reportedly now inevitable, a “restructuring” or a “haircut” for Greek bondholders will take back their devalued bonds for AAA-grade bonds worth 40 percent of the original issue’s face value.) If that move causes the world market to raise interest rates sky-high on new bonds from Italy or Spain or other eurozone countries, the EFSF would then come into play by offering to buy the issuing countries’ bonds at a lower rate. Germany, however, does not want to see the EFSF become liable for support potentially totalling a trillion euros -- for which German taxpayers would be liable.

The IMF could offer significant relief from this quandry. Many political sensitivities have to be dealt with in tapping more largely into the IMF (which is already involved in the bailouts of Greece and Portugal), partly because European politicians fear that they will face comparison with developing countries that took the IMF help and then had to obey orders from a body widely deemed to reflect U.S. influence.

Ironically, the biggest obstacle to a timely and effective intervention by the IMF is to be found in U.S. problems in accepting a bigger role for the IMF.  The resistance in Washington is centered in the budget-conscious House of Representatives, the Congressional lower-house that controls spending and has a majority of conservative fiscal hawks who only acquiesced reluctantly to U.S. participation in previous IMF help to rescue debt-stricken countries in the eurozone.

Now they might be even more resistant.  The U.S. budget crisis has reached an acute point in domestic political negotiations. And an expanded IMF role, if not funded by the U.S., would require finance from China, Brazil, India and other emerging economies that have money but want in return to see their voices expanded at the expense of the U.S. and other Western countries in the IMF and similar world institutions.

Ways around this impasse are under discussion in Brussels. But already the threat of U.S. blockage on the IMF (indicated by U.S. officials in several recent meetings with EU leaders) has fueled suspicions in some sectors of officialdom and public opinion in Europe -- suspicions that Washington is less than fully committed to seeing the euro recover from its current downward spiral.

U.S. officials, from President Barack Obama and Treasury Secretary Timothy Geithner, insist publicly that it is in the American interest to see Europe recover as a strong economic partner. But many Europeans remember how strongly the birth of the euro was opposed by some American policy-makers and many on Wall Street.  More quietly now, they may still want to see the euro and eurozone discredited, according to Europeans in this school of doubt about the real motives in Washington and on Wall Street. Many Europeans blame U.S. public and private profligacy (for example about the sub-prime loans that started the mortgage crisis) as the trigger of the economic crisis across the west, including the euro. Such anti-American suspicions would darken sharply if Washington were perceived to play a spoiler role about IMF help for the eurozone.

The importance of an IMF role is confirmed by the presence of the fund’s managing director, Christine Lagarde, for many days now in Europe as a participant in the bargaining as Europe’s political and economic and financial establishments finally seem to be coming to grips with the euro crisis that has now lasted for two years. Ms. Lagarde, a former French finance minister, has taken up the reins smoothly and effectively since she had to take over suddenly last summer after her predecessor, Dominique Strauss-Kahn, had to step down in a sexual scandal.

In a two-stage EU summit, that started last Sunday and is due for a final session on Wednesday, there have been breakthroughs. Leaders reached overall agreement on recapitalizing Europe’s shaky banks, which they decided required an extra 100 billion euros. They agreed that banks should first raise what capital they can privately, and then turn to their own governments if necessary. If those governments already have debt problems, then the bailout fund, called the European Financial Stability Facility, could be drawn upon, but only “as a last resort,” according to Germany’s fiscally conservative Chancellor Angela Merkel.

One big issue remaining to be decided is how to make the stability fund, now set at 440 billion euros ($606 billion), large enough to cover Spain and especially Italy as well as Greece and the smaller troubled countries of the zone. Germany has been firm in rejecting a French idea to turn the bailout fund into a special-purpose bank backed by the European Central Bank arguing that doing so would violate European treaties, so another approach is needed.  Because of renewed threats that it might suffer a downgrade in its totemic “Triple-A” credit rating, France has lost political weight in this broad disagreement about this new role for the ECB.  In general, France often speaks for the poorer EU “south” in debates with the prosperous, more disciplined EU “north” led by Germany, the Netherlands and Finland. With France and Germany both reluctant to put more of their own money into the stability fund, European leaders are discussing how the IMF could “help expand the pot.”

A possibility that might help overcome Congressional objections and sidestep a difficult new adjustment in IMF voting rights and share holdings would involve creating a separate fund linked to the stability fund that would be open to investors and sovereign-wealth funds from outside Europe, like the Chinese, Indians and Brazilians, as well as non-euro countries like Sweden and Norway.

The goal is to amass resources of 750 billion to 1.25 trillion euros in all, a European official was quoted telling The New York Times.  EU leaders (and Mrs. Lagarde and her U.S. and other masters) are also discussing ways to use the stability fund as insurance against partial losses that might be suffered by holders of sovereign bonds in the Greek haircut or other future semi-disguised partial defaults in other debt-crippled eurozone countries. This possibility would provide another, less controversial way to get greater impact from the fund’s resources in shoring up the eurozone before it drags down the global economy.

The IMF, under Ms. Lagarde, has become much more alarmed about the extent and possible fall-out of financial weakness in Europe. She was among the first leaders to call publicly for a recapitalization of Europe’s banks – a warning initially scorned but now accepted and appartently acted on – by eurozone governments’ leaders.  As IMF officials put it, the message is not intended to scare but on the contrary to bolster confidence.

Another test of confidence now seems to be looming about how effectively the Obama administration can ensure that Washington, despite resistance on the part of Congress, does not emerge as the stumbling block in an overall global effort to turn the corner on the euro crisis. That question now seems set to remain open at least until the summit of G-20 governments in Cannes in the first week of November.

--European Affairs

 
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