IMF calls for bold action, pledges to do whatever it takes to contain euro zone crisis

07:02 AM Sep 26, 2011

WASHINGTON – Europe is working to ramp up the firepower of its bailout fund as the United States, China and other nations raised the alarm about the region’s crisis hurting the world economy.

The International Monetary Fund (IMF) steering committee – chaired by Singapore’s Deputy Prime Minister Tharman Shanmugaratnam – said in a statement that the euro zone was committed to whatever was needed to resolve the single currency bloc’s crisis.

Speaking at a press conference, Mr Tharman added: “We are in a precarious situation. We face a confluence of sovereign debt and banking risk with the epicentre of that being in the euro area, but it is underpinned and complicated by the fact that we also face a weakening global economy.”

Mr Tharman reiterated that the IMF leaders “will do what it takes” to prevent an escalation of the financial crisis and to avoid the possibility of a prolonged period of stagnation in larger economies, which would in turn affect overall growth of the global economy.

The IMF’s statement also warned that the global economy had “entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action” to cope with Europe’s financial stress and prevent it infecting others.

European officials were scrambling to put in place a comprehensive crisis-fighting plan by the time leaders from the Group of 20 nations meet in France in early November.

The European Union’s top economic official, Mr Olli Rehn, said that as soon as the region’s governments confirm new powers for their €440-billion (S$773-billion) fund, attention will turn to how to get more impact from the existing money.

“We need to find a mechanism where we can turn one euro in the EFSF (European Financial Stability Facility) into five, but there is no decision on how we could do that yet,” another senior European official said on condition of anonymity.

The rescue fund would need to be at least €2 trillion to safeguard Italy and Spain if the crisis were to spread, financial analysts estimate.

The US and other nations have urged Europe to leverage up the fund, possibly with support from the European Central Bank (ECB).

But officials from the ECB and from Germany, the region’s paymaster, remained wary of using the central bank, which has a strict mandate to pursue low inflation.

“We should not think of leveraging a public pot of funds as a free lunch,” said ECB Governing Council member Patrick Honohan.

‘IMF’s lending chest may not be enough’

Tripling IMF resources was part of the Group of 20 leaders’ response to the global recession in 2009. As the European debt crisis threatens to spread and further damp the global recovery, the IMF was asked by its steering committee today to review whether its resources are sufficient.

The IMF said would decide by April whether its resources are sufficient to prevent a global credit crunch.

IMF managing director Christine Lagarde said the fund’s billion lending chest may not be enough to meet all loan requests if the global economy worsens.

Ms Lagarde added that its current lending capacity “pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders”.

The IMF could comfortably commit to lending about US$390 billion (S$508 billion) without putting its balance sheet at risk, but in a worst-case scenario it might need to lend about US$840 billion, according to an internal document obtained by Reuters earlier this month.

US Treasury Secretary Timothy Geithner – who was also at the meeting – pressed European policymakers to intensify their efforts to end the 18-month sovereign debt crisis and avoid the “threat of cascading default, bank runs and catastrophic risk”.

In his strongest public push yet for Europe to step up its crisis-fighting, Mr Geithner said strains in the euro-area’s budgets and banks are the “most serious risk now confronting the world economy”. He urged governments to unite with the ECB to immediately “create a firewall against further contagion”.

Billionaire investor George Soros also put pressure on European governments by saying that Greece may be unable to avoid default and its neighbours should prepare for that.

World Bank President Robert Zoellick said failure by Europe and the US to tackle problems in their economies “may shake the entire global economy”, throwing developing countries, which are driving global growth, off track.

“The numbers emerging out of developing countries over the past month, even the past week, are shaking and shaky,” he said. AGENCIES

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