EU States to Send IMF $267 Billion in New Crisis Fight

European leaders added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules, seeking to lure the European Central Bank into stepping up its rescue operations.
In an accord hailed by ECB President Mario Draghi, the leaders outlined a “fiscal compact” to prevent future debt runups, accelerated the start of a planned 500 billion-euro rescue fund and dropped bondholder loss-sharing provisions. The euro weakened and bonds from Italy and Spain fell amid concern the measures failed to address investors’ concerns.
“It’s a very good outcome for euro-area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries,” Draghi told reporters after all-night negotiations ended in Brussels at about 5:00 a.m. today.
European leaders navigated a labyrinth of political, legal and economic constraints during the meeting amid unrelenting pressure from financial markets to craft a new approach to fighting the crisis, which now threatens to engulf Italy and Spain.
At the same time, the leaders ventured into untested legal territory by plotting to anchor the tougher budget rules in a separate euro-area treaty after Britain balked at amending the pact covering all 27 European Union countries.

‘Long Way to Go’

The euro dropped to a one-week low against the dollar in reaction to the measures, the fifth wide-ranging crisis- containment package since the unprecedented 110 billion-euro bailout of Greece in 2010.
“The leaders have now defined the end point they want to reach in terms of fiscal governance, but it’s a long way to go there,” Thomas Mayer, London-based chief economist at Deutsche Bank AG, said in a Bloomberg Television interview with Linda Yueh and Owen Thomas. “I’m a bit skeptical that the markets will come around.”
The currency weakened 0.3 percent to $1.3308 at 9:15 a.m. in Brussels. The Euro Stoxx 50 Index slid 0.6 percent. Yields on Italy’s 10-year notes rose 12 basis points to 6.58 percent, while Spain’s gained 10 basis points to 5.91 percent.
In putting the extra 200 billion euros on the line, European governments for the first time extracted a contribution from the euro region’s national central banks, getting them to lend 150 billion euros to the International Monetary Fund’s general resources. Central banks from non-euro EU states will chip in around 50 billion euros more.

G-20 Contributions

European governments are counting on that downpayment to attract reserve-rich emerging markets such as China to join in the rescue, a month after Europe’s efforts to solicit outside aid ran into obstacles at a Group of 20 meeting.
“I appreciate this demonstration of leadership from Europe and I’m hopeful that others will also do their part,” IMF Managing Director Christine Lagarde said after attending the Brussels summit.
The focus now shifts to the Frankfurt-based central bank after Draghi said last week that a commitment to greater fiscal discipline might put “other elements” in play. Draghi yesterday damped expectations that a Brussels deal would prompt the ECB to supplement its bond-buying operations, on which it has spent 207 billion euros.
After packages in July and October provided a brief lift to markets and then fizzled, European leaders are now under pressure to quickly deliver on today’s promises -- with the response of the politically independent ECB out of their hands.
“As long as the ECB maintains its ‘holier than thou’ attitude, the risk remains grave that the euro-zone could fall into a worsening crisis with a deeper recession and mounting political risks early next year,” said Holger Schmieding, chief economist at Berenberg Bank in London. “We would need to see a stronger ECB response before we can feel more comfortable about the outlook.”

Speeding Fund

Leaders aimed to set up the permanent rescue fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule. By March the EU will reassess plans to cap the overall lending of the ESM and the temporary fund at 500 billion euros. For the time being, Germany deflected a move to grant the ESM a banking license, which would enable it to multiply its firepower by borrowing from the ECB.
In a climbdown by Germany, the permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel had championed “private sector involvement” as a way of lessening the bailout burden on taxpayers.
“To put it more bluntly: our first approach to private sector involvement, which had a very negative effect on the debt markets, is now over,” EU President Herman Van Rompuy said.

Deficit Rules

The new fiscal accord goes beyond a crisis-driven toughening of the rules slated to take effect next week. It would cap structural deficits at 0.5 percent of gross domestic product and require each country to establish an “automatic correction mechanism” when budgets stray from the target.
The blueprint also foresaw a near-automatic disciplinary procedure for wayward countries and “more intrusive control” of taxing and spending by governments that overstep the deficit limit of 3 percent of gross domestic product.
“We will create a new fiscal union for the euro that is also a stability union by setting up a debt brake for all member states of the euro and those who want to join up, and by imposing much more automatic sanctions,” German Chancellor Angela Merkel said.

U.K. Refusal

In a clash that may reshape the European balance of power, the euro users opted to enshrine the rules in a new treaty that leaves out the U.K. instead of going the more traditional route of amending EU treaties that date back to the 1950s. Hungary, Sweden and the Czech Republic, three other non-euro countries, will decide later whether to join the separate treaty.
The trigger was the refusal by U.K. Prime Minister David Cameron to back a 27-nation treaty without ironclad guarantees of a British veto right over future financial regulations. Cameron called them a threat to London’s standing as Europe’s leading financial center.
“Our British friends made unacceptable demands,” French President Nicolas Sarkozy said. “They wanted opt-outs on financial regulation. Since we consider it was lack of regulation that caused the crisis, that was a demand that we couldn’t meet.”