BRUSSELS (AP) ― European Union finance ministers have come up 50 billion euro ($65.19 billion) short of their goal of providing the International Monetary Fund with 200 billion euro ($260.78 billion) to help heavily indebted nations avoid default.
The eurozone will provide an extra 150 billion euro to the IMF through bilateral loans, Jean-Claude Juncker, the prime minister of Luxembourg, who also chairs the meetings of the currency union’s finance ministers, said in a statement Monday.
Greece, Ireland and Portugal, which have received multibillion euro bailouts, won’t have to contribute to the IMF loans.
Of the non-euro countries, only Denmark, Poland, the Czech Republic and Sweden will also send extra money to the Washington-based fund, Juncker said, without giving specific amounts. Poland had previously said it would provide around 6 billion euro, while Denmark has promised 5.4 billion euro ― underlining that the 200 billion euro target will be missed.
The IMF welcomed the money late Monday. “We welcome the EU Finance Ministers’ support for a substantial increase in the IMF’s resources, as we work to strengthen our capacity to fulfill our systemic responsibilities to our global membership,” a spokesperson said in a statement.
The failure to come up with the full amount that had been indicated at a summit of EU leaders just 10 days ago signals further rifts within the 27-country EU. At the summit, the 17 eurozone countries also agreed to set up a new treaty to create tighter fiscal rules for the currency union, which has been rocked by a debt crisis for the past two years.
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European Union flags fly outside the the European Commission headquarters in Brussels. (Bloomberg) |
The new accord was made necessary after the United Kingdom blocked changes to the existing EU Treaty. Britain, the largest economy among the 10 non-euro countries in the EU, also declined to contribute to the 200 billion euro IMF loan target. Its share would have amounted to some 30 billion euro.
Instead, London signaled that it may provide more resources to the IMF through the Group of 20 framework, which most likely wouldn’t be earmarked for the eurozone. “The U.K. has always been willing to consider further resources for the IMF, but for its global role and as part of a global agreement,’’ the office of U.K. treasury chief George Osborne said in a statement.
The extra IMF loans are meant to be channeled into a special fund that will invest alongside the eurozone’s own bailout fund ― the European Financial Stability Facility. The eurozone hopes that its own loans, which will come via national central banks, will encourage other non-European countries to also support Europe via the IMF.
The eurozone is desperate for outside investors, because the 440 billion euro EFSF is seen as way too small to save large economies like Italy and Spain. The EFSF has already committed some 40 billion euro to Ireland and Portugal and may have to take on more than 100 billion euro for a second bailout for Greece.
At the same time, the fund’s ability to raise rescue money cheaply on financial markets is threatened by potential downgrades for several eurozone states that guarantee its lending.
Rating agency Standard & Poor’s earlier this month put 15 eurozone countries, as well as the EFSF, on watch for a downgrade, citing the escalating debt crisis.
France, the second-largest contributor to the EFSF and currently one of six eurozone states with an “AAA” rating, is considered to be at particularly high risk of seeing its creditworthiness cut.
But the President of the European Central Bank Mario Draghi warned Monday that “it’s likely that if France loses its rating, then other countries’ ratings would be changed” as well.
The ECB, which is supposed to help the EFSF in future bond market interventions, is “working actively on all possible scenarios” involving a downgrade of eurozone countries, Draghi said.
He added that the decision by EU leaders at their summit 10 days ago to let the EFSF’s successor, the 500 billion euro European Stability Mechanism, come into force already in July ― one year ahead of schedule ― was the best response to the downgrade threat.
In contrast to the EFSF, the ESM has paid-in capital, similar to a bank, which makes it less vulnerable to downgrades of its contributing states.
While Draghi applauded the outcome of the EU summit at his appearance in front of lawmakers of the European Parliament, he also warned that Europe risks falling back into recession as the crisis escalates.
He also dampened hopes that the central bank would help struggling countries with their debt troubles, stressing that the ECB would continue to support banks’ lending to businesses in an effort to prevent another sharp credit crunch.
