May 18, 2013
Euro-zone deal on firewall awaits Germany
Germany may not be ready to back an increase in Europe's bailout fund at a summit next week, delaying efforts to meet international demands for Europe to strengthen its defenses against the region's sovereign debt crisis.
Many finance leaders of G20 countries, meeting in Mexico City this weekend, have demanded that Europe strengthen its firewall as a condition for providing more resources to the International Monetary Fund.
The two actions would provide greater assurance to markets that the euro zone debt crisis will not spread.
The G20 joined forces in 2008 to fight back against financial crisis which blew up in the United States and caused the worst recession since the 1930s. In the last two years, the chaos has spread to Europe where highly indebted countries have been locked out of debt markets and forced to seek bailouts.
Euro zone officials said they do not expect a decision at a European leaders summit on March 1-2 on combining the resources of two European rescue funds.
Olli Rehn, European Commissioner for Economic and Monetary Affairs, said he expected an agreement on stronger European firewalls will come next month.
"The negotiations are now going on, I am confident that in the course of March, we will be able to take a decision on the reinforcement of the combined lending capacity of the ESM and the EFSF," Rehn told reporters, referring to the two euro zone bailout funds.
Germany, which has stated strong opposition to increasing the bailouts, 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 it budget deficit down to 120 percent 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 the Greek debt swap, which Athens wants to complete by March 12, a euro zone official said.
"Most euro zone 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," the official said.
After mounting these political hurdles, international diplomats and euro zone officials expect Germany will concede to an enlarged EU bailout fund. That in turn would clear the way for G20 countries to agree to add more resources to the IMF when they next meet in Washington at the end of April.
"Everybody says there is a pre-condition that Europe makes more efforts first," South Korea's central bank governor Kim Choong-soo said on Friday.
Increasing IMF resources is on the agenda when G20 finance ministers and central bankers from leading economies begin their meetings on Saturday but a deal will have to wait.
The EU's Rehn said the G20 would probably lay out a roadmap for getting to an agreement by late April.
At issue is whether Europe will agree to combine its temporary bailout fund, the European Financial Stability Fund, with a permanent fund, the European Stability Mechanism, that takes effect in June.
The ESM has a 500 billion-euro limit but merging the two would create a firewall of 750 billion euros ($1 trillion) and go a long way toward convincing markets that Europeans are committed to bringing the crisis under control.
In addition, the IMF is seeking additional resources of up to $600 billion which would provide an even bigger wall of cash to fight the sovereign debt crisis that has already pushed three euro zone countries -- Greece, Portugal and Ireland -- into IMF bailouts and has threatened to spread to the much bigger economies of Italy and Spain.
The United States has said it will not provide more funds for the IMF. Canada is reluctant too, unless the euro zone makes a bigger effort. That leaves China and Japan as the two candidates that potentially would make the largest contribution to IMF resources through bilateral loans.
One G20 official said there were hopes that China, the world's second-biggest economy, could contribute some $100 billion to the IMF and Japan another $50 billion. Both countries have said that the euro zone must move first.
A draft set of conclusions prepared ahead of next week's EU summit in Brussels showed euro zone leaders will call for an international deal to increase IMF resources in April, implying a deal within the euro zone on its bailout funds in March.
"What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door," one senior euro zone official said.
The concern in Germany has been that bolstering bailout resources would cause countries to lose the impetus to carry out badly needed belt-tightening reforms. "It makes no sense, and is rather harmful," said one German official.
For Germany, rather than quickly combining the funds, one of the options could be to allow the permanent ESM to reach full capacity of 500 billion euros more quickly than over five years from July 2012, as envisaged now.