EU Ministers Seek Crisis IMF Funding Deal

Bloomberg

By Patrick Donahue and Stephanie Bodoni - Dec 19, 2011 10:58 AM GMT+0200

… it’s doubtful they’ll put markets in a Christmas mood…

… an overall crisis solution may be “technically and politically beyond reach.”…

… the U.K. hadn’t agreed to increase its IMF contribution…

… requiring a high-deficit state to amass a super majority within the euro region to head off disciplinary procedures,…

European finance ministers will today seek to meet a self-imposed deadline for drawing additional aid to the debt crisis and to form new budget rules as investor confidence that a comprehensive solution is achievable wanes.

Euro-area finance ministers will hold a conference call at 3:30 p.m. Brussels time to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

“They’ll try to get as much done as they can before Christmas, but it’s doubtful they’ll put markets in a Christmas mood,” Carsten Brzeski, an economist at ING Group in Brussels, said in an interview. “There is still so much uncertainty.”

The accord to ratchet up budget rules failed to ease concern that the monetary union risks buckling under the weight of the two-year-old crisis. Fitch Ratings lowered France’s credit outlook and put other euro-area nations on review Dec. 16, saying an overall crisis solution may be “technically and politically beyond reach.” Belgium’s rating was cut two levels to Aa3 by Moody’s Investors Service on the same day.

ECB Bond Purchases

European Central Bank President Mario Draghi damped expectations the bank will step up bond purchases to tame rising borrowing costs, telling the Financial Times in an interview published today that the bank can’t overstep its mandate.

“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi said in the interview. “The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won’t achieve that by destroying the credibility of the ECB.”

Euro-area officials aim to meet their deadline for today to arrange the IMF loans. The package entails about 150 billion euros pledged by euro-area central banks and another 50 billion euros to be contributed by non-euro EU states. The euro-area ministers will be joined in the call by their EU counterparts to thrash out measures including the decision-making process of the bloc’s permanent bailout fund, the European Stability Mechanism, one of the people said.

No ‘Urgent Need’

While leaders including Luxembourg’s Jean-Claude Juncker have expressed confidence that today’s deadline will be met, Germany’s Bundesbank said Dec. 16 it saw no “urgent need” to reach a decision, suggesting it could be delayed.

The euro lost 2.5 percent against the U.S. dollar last week after the Brussels summit and extended the loss today, sliding 0.3 percent to trade at $1.3011 at 9:04 a.m. Frankfurt time. The U.K.’s refusal to sign on to an EU-wide treaty change locking in new debt rules exposed divisions within the bloc and forced euro-region leaders to come up with a legal framework to patch together budget rules.

“The systematic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region,” Fitch said in a note. The growing uncertainty is overshadowing countries’ reform efforts, it said.

Fitch cited the ECB’s failure to act as a financial backstop as contributing to its decision last week. Fitch placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review.

Stark’s Disappointment

Divisions within the ECB on bond buying were revealed by departing ECB Executive Board Member Juergen Stark, who told the German magazine WirtschaftsWoche in an interview that his decision to leave derived from his disappointment over “how this monetary union has evolved.” He criticized the bond purchases.

The U.K. is weighing whether to commit more funds to the IMF. Prime Minister David Cameron’s spokesman said Dec. 14 that the U.K. hadn’t agreed to increase its IMF contribution, fending off a report in the Daily Telegraph newspaper that the nation’s contribution might rise by 30 billion pounds ($46.5 billion).

Today’s conference call may focus on setting a road map for more detailed debate next month on a German-inspired budget- stability treaty. Chancellor Angela Merkel demanded treaty-level barriers against runaway debt and deficits to offer the prospect of a future “fiscal stability union” that restores investors’ shattered confidence in Europe’s economic management.

The European Commission’s power to enforce deficit limits will be strengthened, requiring a high-deficit state to amass a super majority within the euro region to head off disciplinary procedures, according to a draft of the text.

Governments will also be required to adopt balanced-budget amendments with an “automatic correction mechanism.” Those provisions will be enforced by the European Court of Justice and national courts.

The treaty, to be hammered out by late January and signed in early March, will take effect once ratified by nine of the 17 euro-area countries. EU states outside the euro will join as they ratify, with the U.K. alone so far in refusing to sign up.

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net