IMF aid may be needed as single currency faces ‘crucial 10 days’

EUROPE faces a crucial 10 days to save the eurozone, after agreeing to ramp up the firepower of its bailout fund but acknowledging it may have to turn to the International Monetary Fund for more help to avert financial disaster.

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Economic and Monetary Affairs Commissioner Olli Rehn said yesterday as EU finance ministers met.

Eurozone ministers agreed detailed plans on Tuesday to leverage the European Financial Stability Fund (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.

Two years into Europe’s sovereign debt crisis, investors are fleeing the eurozone bond market, European banks are dumping government debt, peripheral European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.

“We are now looking at a true financial crisis — that is a broad-based disruption in financial markets,” Christian Noyer, France’s central bank governor, said in Singapore.

The 17-nation euro group adopted detailed plans to insure the first 20%-30% of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy eurozone government bonds.

Both schemes would be operational by January with about €250 billion from the eurozone’s EFSF bailout fund available to leverage after funding a second rescue programme for Greece, Eurogroup chairman Jean-Claude Juncker said.

The aim was for the IMF to match and support the new firepower of the fund, Mr Juncker told reporters.

But with major sovereign funds cautious about investing more in eurozone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.

“It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along.”

Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis.

The prospects of drawing the IMF more deeply into supporting the eurozone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender.

Key events of next 10 days:

Thursday, December 1 French president Nicolas Sarkozy to present proposals for closer fiscal integration among eurozone members.

Spain to tender up to €3.75bn of bonds at auction, while France is aiming to sell up to €4.5bn of paper, this after Italy was forced to pay nearly 8% to borrow for three years this week.

ECB president Mario Draghi is to present ECB’s annual report to the European Parliament.

Friday, December 2 Chancellor Angela Merkel is expected to make a speech outlining Germany’s vision for fiscal integration.

Sarkozy will meet British Pprime minister David Cameron with the key issue being Britain’s willingness, or lack of it, to allow a process of EU treaty change to forge closer eurozone integration in return for the chance to repatriate some powers to London. Change requires unanimous support.

Monday, December 5 Italian prime minister Mario Monti is expected to set out his debt-cutting measures in Rome, having been told by Brussels that he would have to take extra measures beyond an austerity plan already adopted.

Wednesday, December 7 Centre-right EU leaders meet in Marseille for two days. Merkel, Sarkozy and incoming Spanish premier Mariano Rajoy will be there on Thursday, as will top EU officials Herman Van Rompuy and Jose Manuel Barroso.

Greek parliament is expected to vote on its 2012 austerity budget, a crucial part of its bailout terms. If passed, it will herald the return of the troika — comprising representatives of the European Commission, the ECB and the IMF — to Athens the following week.

Germany will auction around €5bn of five-year debt.

Thursday, December 8 Last ECB policy meeting of the year. A Reuters economists poll forecast a 60% chance of a rate cut to 1.0% and a big majority said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat.

The poll gave a 40% chance of the ECB stepping up bond purchases with freshly printed money within six months, though it may eventually have to conclude that the biggest threat lies in recession, a credit crunch and the risk of deflation rather than inflation.

Friday, December 9 EU leaders’ summit in Brussels. The focus will be on new rules to tighten fiscal integration. The question is if that will be done via time-consuming treaty change which would need to be ratified by all 27 EU members or if a short cut, involving the single currency group pressing ahead alone, will be pursued.

The optimistic view is that embarking on that process will calm financial markets. Dramatic measures involving the ECB breaking its rules by radically increasing its bond-buying support are unlikely at this point, but there will surely be discussions about a way to get the IMF more involved. Analysts say a summit that falls short could lead to a harsh market reaction.

Reuters