Saving the Common Currency: Euro Zone Looks to IMF for Increased Help

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Euro zone finance ministers agreed on Tuesday night on measures to boost the euro backstop fund. But with the crisis rapidly worsening, the IMF may increase aid to the stricken currency union. European currency commissioner Olli Rehn says the euro is entering a critical 10-day period that may determine its fate.

French Finance Minister Francois Baroin with European Central Bank President Mario Draghi and German Finance Minister Wolfgang Schäuble in Brussels on Tuesday. Zoom
DPA

French Finance Minister Francois Baroin with European Central Bank President Mario Draghi and German Finance Minister Wolfgang Schäuble in Brussels on Tuesday.

Finance ministers from the 17 member-states of the European common currency zone have fulfilled their promise. On Tuesday evening in Brussels, the so-called Euro Group, a collection of euro-zone finance ministers, agreed on measures to increase the impact of the euro backstop fund, the European Financial Stability Facility (EFSF). The hoped-for result is a boosting of the fund far beyond its current lending capacity in order to assist heavily indebted euro-zone countries.

But in an apparent recognition of the drastically increasing severity of the financial crisis battering Europe, Euro Group President Jean-Claude Juncker said that the possibility of greater International Monetary Fund (IMF) involvement was being explored.

"We also agreed to rapidly explore an increase of the resources of the IMF through bilateral loans, following the mandate from the G-20 Cannes summit, so that the IMF could adequately match the new firepower of the EFSF and cooperate more closely," Juncker said.

According to a statement released by the EFSF on Tuesday evening, the fund will provide a kind of "first-loss" insurance to investors in state bonds issued by euro-zone member states. The measure will cover between 20 percent and 30 percent of losses in the case of a state insolvency and is intended to encourage investors to buy sovereign bonds from countries such as Italy, Belgium and Spain, which have recently struggled under exorbitant interest rates being demanded for their bonds.

'Maybe Half of That'

An additional measure envisions the creation of one or more funds in which investors outside the euro zone could invest.

"We made important progress on a number of fronts," Juncker, who is also the prime minister of Luxembourg, said on Tuesday night.

The EFSF has a lending capacity of €440 billion ($586 billion). But with much of the fund already committed to Ireland and Portugal as well as to a new bailout fund for Greece and measures to assist European banks in meeting new capital requirements, the amount available for leveraging was just €250 billion. The EFSF hopes to be able to implement the new measures early next year.

The degree to which the new measures will actually boost the fund remains unclear. It had been hoped that the strategy would result in a fund three to five times larger than the current amount available -- meaning the EFSF would have firepower worth €750 billion to €1.25 trillion. Such an amount would be sufficient to temporarily finance a larger euro-zone country such as Italy or Spain.

But it remains doubtful that such a total will be achieved. Documents prepared by EFSF ahead of the meeting, which SPIEGEL has seen, indicated that a lack of interest from potential outside investors, particularly from Asia, could mean that the firepower of the fund may only increase to between €500 billion and €750 billion. The most recent statements from China, for example, would seem to indicate that Beijing is more interested in investing in European infrastructure than in the EFSF fund.

Dutch Finance Minister Kees de Jager, saying that investors had not showed the interest many had hoped for, made a plea for realism on Tuesday. "It will be very difficult to reach something in the region of a trillion," he said. "Maybe half of that."

Lack of Investors

EFSF chief Klaus Regling, who immediately embarked on a fund-raising trip to China following the late October European Union summit at which EU leaders agreed to boost the fund, reported on the results of his efforts on Tuesday. And he asked for patience. "Leverage is a process over time," he said. While he said that many overseas investors were interested, he said "we do not expect investors to commit large amounts of money during the next few days or weeks."

Time, though, is a luxury that the euro zone does not appear to have. It is hoped that an increased participation by the IMF could help alleviate potential shortfalls. Such participation would likely involve bilateral agreements between the IMF and euro-zone member states in need. "I just want to underline that the European Union and the European Commission is supportive of increasing the resources of the IMF, and we see pretty much eye-to-eye with (IMF) managing director Christine Lagarde in this regard," said Olli Rehn, the commissioner for economic and monetary affairs. He added that it must still be clarified which countries might be assisted by the IMF.

Still, even as euro-zone finance ministers have moved plans for the leveraging of the EFSF forward, concerns persist that it could be too little too late. Interest rates on sovereign bonds of several euro-zone countries, including most ominously those of Italy and Spain, have been extremely high for weeks, in some cases spiking well over the 7 percent mark, a level seen as unsustainable on the long term. But even the rates on Belgian, French and Austrian bonds have been hiking upwards. An unsuccessful German bond sale last week also raised eyebrows.

'Critical 10-Day Period'

Many have raised the possibility of introducing euro bonds as a way of pooling euro-zone debt to lower interest rates for heavily indebted member states. Germany, however, has been skeptical of such a step and has insisted on greater euro zone fiscal integration before it would consider supporting euro bonds. Chancellor Angela Merkel has spoken several times recently of the need to amend European Union treaties to stiffen the economic rules that govern the euro zone.

Another measure being discussed -- and one which could provide immediate relief -- involves the European Central Bank purchasing bonds from stricken euro-zone states on a massive scale. In the last 18 months, the ECB has already acquired over €300 billion in euro-zone sovereign bonds, but many would like to see it dramatically increase the program. Some have demanded that the ECB emulate the role played by the United States Federal Reserve and the British central bank, both of which have embarked on unlimited bond buying sprees in the past to prop up their currencies.

Germany, though, is opposed to the idea, as is the ECB itself, which must ultimately make the final decision on bond buys. Many believe that, should the crisis significantly worsen, the ECB will be left with no other choice.

And that decision could come sooner rather than later. Speaking on Wednesday morning, Rehn underlined the urgency of the crisis facing the euro zone. "We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," he said.

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Graphic: Interest rates on euro-zone sovereign bonds. Zoom
DER SPIEGEL

Graphic: Interest rates on euro-zone sovereign bonds.

Graphic: ECB bond purchases in 2011. Zoom
DER SPIEGEL

Graphic: ECB bond purchases in 2011.


Graphic: At-risk countries in the euro zone. Zoom
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Graphic: At-risk countries in the euro zone.


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