G20 inches toward $2-trillion in rescue funds

Germany is easing its opposition to a bigger European bailout fund, officials said, smoothing the way for the world’s leading economies to secure nearly $2-trillion in firepower to prevent further fallout from the eurozone’s sovereign debt crisis.

Finance leaders from the Group of 20, meeting in Mexico City this weekend, are trying to build up massive international resources by the end of April to convince financial markets they can prevent the eurozone’s deep problems from inflicting more damage on a still-fragile world recovery.

It would mark their boldest efforts since 2008 when the G20 mustered $1-trillion to rescue the world economy from the credit crisis, which blew up in the United States and caused the worst recession since the 1930s.

They are demanding that Europe build up its war chest first and then other G20 countries would contribute extra money to the International Monetary Fund. As Europe’s richest economy, Germany’s support for a larger European fund is critical.

A senior G20 official said Berlin was prepared to discuss boosting the firewall in March, but it saw no reason to increase the bailout fund for now because the situation in financial markets has been improving.

The plan is to merge Europe’s temporary and permanent bailout funds, the European Financial Stability Fund and the European Stability Mechanism , to create one €750-billion ($1-trillion) fund. Increased IMF resources would back that up.

“Everyone in the eurozone and even in European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March,” said Margrethe Vestager, economy minister of current EU president Denmark.

Merging the funds would mark a softening of Berlin’s stance. It has warned that a bigger fund would remove pressure on deeply indebted countries to enact the tough fiscal measures and economic reforms needed to bring their budgets under control.

G20 finance chiefs are piling the pressure on Germany as they try to line up the roughly $2-trillion in resources by the time they next meet in April and draw a line under the two-year-old eurozone crisis.

“I do want to encourage Germany to take that leadership role very seriously and come up with an overall eurozone plan,” said Canada’s Finance Minister Jim Flaherty.

Some diplomats have said Germany’s reticence to back the bigger bailout plan was linked to a key vote on Monday by German lawmakers on Greece’s new financial lifeline, another part of the broader push to ring-fence the eurozone crisis.

Europe’s problems have weakened the global recovery and roiled financial markets, which have locked highly indebted countries — Greece, Ireland and Portugal — out of debt markets and forced them to seek bailouts. Italy and Spain also are under threat, and bank credit has tightened.

German Finance Minister Wolfgang Schaeuble told bankers in Mexico City that he was worried that the root causes of Europe’s problems have not been tackled sufficiently and showed no sign that he was ready to announce a shift in course on issues such as common eurozone bonds as well as bigger bailout funds.

“It does not make any economic sense to follow the calls for proposals which would be mutualising the interest risk in the eurozone, nor in pumping money into rescue funds, nor in starting up the ECB printing press,” Schaeuble said.

Big bazooka
A European agreement during March to merge the EFSF and the ESM to create a $1-trillion war chest would clear the way for other G20 countries in April to meet the IMF’s request for $500-$600-billion in new resources, on top of its current $358-billion in funds.

Put together, this would total about $1.95-trillion in firepower. But the G20 has no intention of easing the pressure on Europe by giving it a strong signal now that new IMF money is in the bag.

A G20 communique at the end of the ministerial meetings on Sunday will merely state that the world’s leading economies will review the resources of the IMF in April without setting a date for a deal, G20 officials said.

Olli Rehn, European Commissioner for Economic and Monetary Affairs, said more funds are essential. “In order to overcome the crisis, you have to get ahead of the curve and have a big enough bazooka,” he told reporters.

“The negotiations are now going on,” Rehn said, adding he was confident that a decision to merge the European funds would be taken in March.

A eurozone official said a deal is unlikely to come in time for a summit of European Union leaders next week which could nonetheless reveal some flexibility by Berlin: “What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door.”

Germany needs time
Diplomats said Germany appears to be playing for time. It faces a critical vote on Monday to win support in the German Parliament for Greece’s second rescue package. Many Bundestag members are skeptical that Greece can meet tough fiscal conditions required to bring its public debt down to 120% of GDP by 2020.

Similar votes are scheduled in The Netherlands and Finland next week. Germany also wants to see whether enough investors sign up for Greece’s debt swap, which Athens wants to complete by March 12, a eurozone official said.

“Most eurozone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag,” one eurozone official said.

The United States has said it will not provide more funds for the IMF. But it is not standing in the way of other countries lending to the Fund and is keeping up the pressure on Europe to put forward first more of its own money.

“I hope that we’re going to see, and I expect we will see continued efforts by the Europeans … to put in place a stronger, more credible firewall,” US Treasury Secretary Timothy Geithner said on Saturday.

Policymakers said they were hopeful that putting in place a strong firewall against further crises in Europe would help strengthen the world economy.

“The economy is somewhat picking up in the world as a whole including Japan and [we] want to put an end to the Europe crisis in the early spring and to accelerate the global economic growth,” Japan’s Finance Minister Jun Azumi said. – Reuters

Daniel Flynn
Daniel Flynn works from Sao Paulo, Brazil. Latin America Editor for Thomson Reuters. Former bureau chief in Brazil and West Africa and correspondent in France, Spain, Italy, Greece and Venezuela. Daniel Flynn has over 1419 followers on Twitter.
Advertisting

Inquest into Neil Aggett’s death begins

The trade unionist was found hanged in his cell at the John Vorster Square police station in 1982

SANDF colonel accused of swindling colleagues in UN business scam

A senior soldier who is part of South Africa’s peacekeeping missions is accused by her colleagues of swindling them out of of hundreds of thousands of rands in a nonexistent business deal

Mass store and job cuts at Massmart

Changed market conditions and an appalling economy has hit low end cash-and-carry outlets

Courts to guide land expropriation

Two bits of law need to be approved before a court can decide if land owners will be compensated
Advertising

Press Releases

South Africans unsure of what to expect in 2020

Almost half (49%) of South Africans, 15 years and older, agree or strongly agree that they view 2020 with optimism.

KZN teacher educators jet off to Columbia University

A group of academics were selected as participants of the programme focused on PhD completion, mobility, supervision capacity development and the generation of high-impact research.

New-style star accretion bursts dazzle astronomers

Associate Professor James O Chibueze and Dr SP van den Heever are part of an international team of astronomers studying the G358-MM1 high-mass protostar.

2020 risk outlook: Use GRC to build resilience

GRC activities can be used profitably to develop an integrated risk picture and response, says ContinuitySA.

MTN voted best mobile network

An independent report found MTN to be the best mobile network in SA in the fourth quarter of 2019.

Is your tertiary institution is accredited?

Rosebank College is an educational brand of The Independent Institute of Education, which is registered with the Department of Higher Education and Training.

Is your tertiary institution accredited?

Rosebank College is an educational brand of The Independent Institute of Education, which is registered with the Department of Higher Education and Training.

VUT chancellor, Dr Xolani Mkhwanazi, dies

The university conferred the degree of Doctor of Science Honoris Causa on Dr Xolani Mkhwanazi for his outstanding leadership contributions to maths and science education development.