G20 finance chiefs split on eurozone rescue bill

FINANCE chiefs from the G20 group of rich and developing nations were last night wrangling over whether the eurozone should pick up the whole bill for its escalating debt crisis or the rest of the world should help out more.

The International Monetary Fund – the world’s lender of last resort for cash-strapped countries – has until now funded about a third of the cost of the bail-outs of Greece, Ireland and Portugal.

But while some, including the United States, are arguing that the eurozone has more than enough money to spend its way out of the crisis, others are pushing for more support as the currency union’s debt troubles risk dragging the world economy back into recession.

In recent days, markets have been buoyed by hopes that the 17 countries that use the euro will sort out key aspects of a more aggressive solution to their debt crisis in time for an EU summit on 23 October and a G20 meeting in early November. Any such deal is going to be extremely costly. As well as shoring up Europe’s weaker banks, the eurozone has to come up with a strategy to stop large economies like Italy and Spain from joining the bail-out club.

To do that, the region’s bail-out fund, the €440 billion (£386bn) European Financial Stability Facility (EFSF), is expected to soon start buying their bonds on the open market – the hope is that will support their prices and keep a lid on their borrowing costs to allow them to carry on funding themselves in the markets.

But most economists, and a growing number of European officials, believe that the EFSF is far too small to stabilise both countries and recapitalise banks in other cash-strapped countries.

While the eurozone is working on ways to maximise the impact of its limited resources, there is a growing drive to get the IMF to stump up more cash. However, any attempt to get the IMF to play a more hands-on approach, by possibly joining the EFSF in bond market interventions, is likely to meet with some resistance, as well as require changes to the IMF’s legal framework.

At yesterday’s talks in Paris, German finance minister Wolfgang Schaeuble said an increase in the IMF’s resources was not necessary. “The IMF has enough to fulfil its tasks,” he said as he arrived at the meeting. He said help and solidarity from the rest of the world was welcome, but stressed that “the Europeans have to take care of the biggest part of the task”.

Mr Schaeuble said he expected EU leaders to take the necessary decisions to tackle the crisis. “We are on the way to take clear measures to contain the danger of contagion,” he said.

US Treasury secretary Timothy Geithner indicated yesterday that he was in favour of maintaining IMF support, but stressed that Europe had enough money to resolve its troubles on its own.

He also opposed beefing up the IMF’s resources, as might be required if the fund was to take on a more active role.

“The IMF has very, very substantial uncommitted resources because of the actions we took in 2009 and 2010,” Mr Geithner said.

“If Europe has a comprehensive strategy in place that looks like it makes sense and is using the very ample financial resources of Europe, then we’re happy to see the IMF play a continuing role, as it’s been playing in supporting what the Europeans are doing.”

The pressure on the eurozone countries to finally get a grip on its debt crisis has ratcheted up in recent weeks amid signs that it is taking its toll on the global economy. Trouble in Europe’s banks could knock-on effects all around the financial system, similar to what happened after the collapse of Lehman Brothers in 2008.

“We have lost a million jobs, we have lost on the revenue side and the current events actually create greater uncertainty and lack of confidence, so it is absolutely crucial, that both, as the G20, but certainly as Europe, that we get a higher level of decisiveness in terms of resolving this crisis,” South African finance minister Pravin Gordhan said.

Mr Gordhan also appeared somewhat more open to a larger role of the IMF in Europe. “It is about getting ahead of the curve and developing the financial firepower which would enable Europe to assure the rest of the world that either on its own, through the EFSF, or with the IMF, they are able to actually contain this contagion,” he said.

The meeting of G20 finance ministers and central bankers in Paris continues today. The get-together is a stop on the road to a meeting of EU leaders on 23 October, when the eurozone is expected to present its new and improved crisis strategy, and a G20 summit of leaders in Cannes early next month.