IMF urges euro funds, ECB to shore up single currency
By Sarah Collins | Friday 22 June 2012
International Monetary Fund chief Christine Lagarde has said that the euro’s rescue funds should be allowed to inject funds directly into eurozone banks as part of an emergency plan to revive growth and save the single currency. She told eurozone finance ministers at a meeting in Luxembourg, on 21 June, that while they should continue with fiscal and structural reforms, they should also outline plans for a future fiscal and banking union. “As we see it at the moment, the viability of the European monetary system is questioned,” she said after presenting the IMF’s regular ‘Article IV’ report on the eurozone. “We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area,” she said.
Her comments come after a rescue package of up to €100 billion was agreed for Spanish banks, on 9 June, with the loan set to appear as a debt on the government’s balance sheet. The move - along with the fact that loans from the eurozone’s future rescue fund, the European Stability Mechanism (ESM), will have seniority over other loans - have added to Spain’s borrowing costs instead of pushing them down. “Clearly the preference of the IMF [...] is to try to break this negative loop between banks and sovereigns that arises from the recapitalisation or the injection of funds directly to the state towards the banks,” she said. “Our preference is that this recapitalisation or financing be done without the intermediary of the sovereign, and direct from the EFSF or ESM to the banks that need recapitalisation.”
Lagarde said eurozone states should also move towards mutualising their debts - on the condition of a commitment to cede more budgetary power to the EU - a suggestion that is unlikely to sit well in Germany, where Chancellor Angela Merkel has ruled out the introduction of eurobonds before there is a full fiscal union. “Introduction of a limited form of common debt, with appropriate governance safeguards, can provide an intermediate step towards fiscal integration and risk sharing,” the IMF said.
IMF recovery plan for eurozone
To boost growth in the short term: The ECB should buy troubled countries’ bonds or lower interest rates, governments should continue cutting spending, aiming for a structural balance (stripping out the cost of debt servicing and one-off revenue or spending), and the eurozone’s rescue funds should be used to directly recapitalise banks.
In the long term: Governments should agree now to create a future banking union with a common banking supervisor and euro-wide deposit guarantee fund, start issuing common debt and prepare for ceding more budgetary power to the EU. They should also continue “structural reforms,” including lowering wages and the ECB should consider allowing higher inflation rates and larger differences in inflation between northern and souther countries.