http://www.reuters.com/article/2012/02/25/us-g-idUSTRE81N1L620120225
(Reuters) - World economic powers told Europe on Friday it would have to do more to fight its financial crisis before they agree to provide back-up in the form of a bigger IMF war-chest.
Finance ministers and central bankers from the Group of 20 top economies are gathering in Mexico City with Europe hoping that China, Japan and others will soon commit to giving the International Monetary Fund more money so it can help euro zone countries which suffer a cash crunch.
But many G20 countries are insisting that Europe needs to take the first step by bolstering its own bailout funds.
"I expect no decision at the G20 summit on boosting the IMF's resources," said Jens Weidmann, head of Germany's central bank and a European Central Bank (ECB) Governing Council member.
The host of the weekend's meetings, Mexico's finance minister, Jose Antonio Meade, said it was "still early in the process" to discuss specific amounts and ways that G20 nations could commit more money.
The world's rich countries have used the G20 to coordinate their response to the financial crisis that erupted in 2008 after the collapse of the U.S. housing bubble and then spread to Europe where many countries are saddled with heavy debts.
As the crisis has dragged on, however, divisions over how to tackle it have deepened. The IMF wants to raise as much as $600 billion in extra resources to help deal with fallout from the euro zone debt crisis, but the plan faces resistance from countries including the United States and Canada.
The United States has told Europe to do more on its own and also made clear it will not provide more cash to help the IMF handle the crisis.
"What we don't want to see is the IMF substitute -- and it really cannot substitute -- for a stronger European response,"
U.S. Treasury Secretary Timothy Geithner told CNBC television.
Even if it wanted to, President Barack Obama's administration would have little or no chance of getting Congress' approval in an election year to send more cash to help out Europe.
U.S. reluctance has put the onus on Europe's richest countries plus China, Japan and others to raise the funds.
EU leaders will meet next week to discuss boosting their own bailout funds. Even G20 countries that are willing to help are unlikely to promise more money until Europe proves it is acting to help itself.
"The problems many countries are facing today have a solution if they act decisively and in time," said Mexico's central bank governor Agustin Carstens. "If this is done sooner rather than later we will see a promising future for the global economy."
Despite the stand-off over timing, there was broad agreement within the G20 about the need to increase eventually the IMF's firepower and that would likely be reflected in a communique at the end of the weekend's meetings, diplomats said.
GERMANY HITS BACK
Germany has come under pressure with critics saying it could
do more to help its struggling European partners and that its insistence on fiscal belt-tightening risks plunging Greece even deeper into crisis.
Weidmann hit back on Friday, saying Germany was already financing a "disproportionately large share" of rescue efforts to date and that its insistence on budgetary discipline was aimed at ensuring a stable monetary union.
He said there was a popular misconception that Germany had managed to "dodge the flames of the current crisis ... (and) ... is now selfishly refusing to come to the aid of the stricken countries by acting as chief firefighter."
Mark McCormick, a currency strategist at Brown Brothers Harriman in New York, said the long-term answer to Europe's problems would require further progress on a common approach to running national budgets.
"Money from the G20 via the IMF buys them a bit more time," he said.
Some member countries will push the G20 this weekend to at least outline the mechanisms it would use to help.
"Since we might not be able to finalize any numbers, money pledges by individual countries, we should not waste the opportunity to move forward," said Paulo Nogueira Batista, Brazil's representative at the IMF.
The next opportunities for the G20 to agree on more funds for the IMF are most likely to be in April, at the twice-yearly Fund meetings, or in June, when G20 leaders meet in Mexico.
While policy makers squabbled over whether and how to boost the IMF's firepower, a group of international bankers joined calls for the G20 to work harder to boost growth, warning that the euro zone crisis threatens to hit the global economy.
Governments should also take a slower approach on tough new financial rules, the Institute of International Finance said on the eve of the G20 meeting here.
The IIF welcomed the progress Europe has made in addressing its sovereign debt problems through an emergency bailout fund, central bank liquidity, and toughened fiscal rules. But it cautioned that budget cutbacks in weaker countries like Greece and Spain could severely damage long-term growth prospects.
"While necessary, fiscal austerity will in the short term weigh on already sub-par growth," it said. "Mitigating the impact of fiscal austerity is key."
and....
Part of the measures seen feasible by Europe are squeezing the most vulnerable - which of course aren't the insolvent banks........
http://www.nakedcapitalism.com/2012/02/ecb-president-draghi-declares-war-on-europes-social-safety-nets.html
I’m late to the remarkable interview given by ECB president Mario Draghi to the Wall Street Journal. I find the choice of venue curious, since the Financial Times has become the venue for top European politicians and technocrats to communicate with English speaking finance professionals.
But Draghi’s drunk-on-austerity-Kool-Aid message was a perfect fit for the Wall Street Journal. While he wasn’t as colorful as Andrew Mellon’s famous “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Draghi is still a true heir in believing that his prescription, per Melllon, will result in “High costs of living and high living will come down.” The “high living” that Draghi is particularly opposed to is Europe’s social safety nets.
The bizarre part about that is it is those very programs that kept Europe from being in even worse shape than it is now. I recall in early 2009 that American economic officials were hectoring Europeans, particularly Germans, for not doing enough in the way of economic stimulus. European readers argued that that reflected abject ignorance. Germany provides generous support to idled workers, and that spending was automatic. Germany performed far better than its US critics anticipated.
Not surprisingly, the Journal did not question the notion that democratic governments should take orders from an unelected finance official. But Draghi tried to make his views sound a tad more legitimate by blaming the planned ritual sacrifice as a demand of the market gods.
From the Wall Street Journal:
European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete…He said Europe’s vaunted social model—which places a premium on job security and generous safety nets—is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people…He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity…“There is no feasible trade-off” between economic overhauls and fiscal belt-tightening, Mr. Draghi said…
Can he really not see what happened in Ireland and Latvia, and what is taking place in Greece? Did he somehow not notice that Greece falls short of its growth targets every time the screws are turned tighter? This is like watching a medieval doctor apply more leeches to a patient that has already passed out from blood loss. There is no prosperity happy ending in this story, save for a very few at the top. And the process is not “belt tightening” but open warfare on basic social structures.
And we have the predictable threat:
“Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.
Um, what has led bond yields to fall is the LTRO, which has taken the concern of bank failures off the table and allows (actually, encourages) banks to take their “trash” collateral and use it to secure LTRO financing. That means banks can engage in a carry trade: buy periphery debt and use it to obtain cheaper LTRO lending. For Draghi to insinuate that the tightening of spreads has anything to do with fiscal targets is dishonest. It has everything to do with the ECB (for the moment, anyhow) supporting the banks and the markets. Investors believe they can rely on the Draghi put.
If the market reaction really were about fiscal sustainability, we’d still here nervous talk about Italy. Its bond yields are still in excess of 5%, and since its growth rate is nowhere near that level, so its debt to GDP ratio will continue to rise. But as long as the ECB stands ready to throw liquidity at any emergency, the markets will remain complacent.
The Journal did include some sane remarks, albeit well into long article:
“He’s just sugar coating the message,” said Simon Johnson, former chief economist at the International Monetary Fund.“A lot of this structural reform talk is illusory at best in the short run…but it’s a better story than saying you’re going to have a terrible 10 years,” he said.
10? Remember, it’s been more than 20 in Japan. 10 could turn out to be a very good result indeed.
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