ECB lending to IMF idea ‘discussed’

EUROZONE and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest eurozone sovereigns, officials said.

“Some discussions on this have taken place... It could be one way of getting around the legal restrictions on the ECB,” one official with knowledge of the talks said. A second official said ECB lending to the IMF was being explored.

The idea appears as the rising severity of the eurozone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms.

Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the eurozone bailout fund EFSF to€1 trillion were unlikely to fully materialise or, even if they do, to be sufficient.

But EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to eurozone governments, which should first of all change policies that created large public debt and slow growth.

France has openly called for the ECB to get more involved by issuing the eurozone bailout fund — the European Financial Stability Facility (EFSF) — a banking licence that would allow it to refinance itself with the ECB liquidity operations.

Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB’s independence and in the end lead to higher inflation, which would make all eurozone citizens poorer.

Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any eurozone government, could achieve that, officials said. “It is just an idea, at least for now,” a eurozone official said.

Article 23 of the ECB statute says that “the ECB may conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations”.