LONDON, UK – The head of the IMF has urged European governments to significantly boost the size of their bailout fund in order to prevent Italy and Spain sliding towards default and avoid destabilizing the global financial system.
As euro zone finance ministers and European Central Bank (ECB) representatives gathered in Brussels on Monday for their latest meeting on the euro zone crisis, Christine Lagarde, managing director of the International Monetary Fund (IMF), said the euro zone needed a bigger firewall to ensure countries like Italy and Spain aren’t forced into a financing crisis.
“This would have disastrous implications for systemic stability,” she said in a speech in Berlin, according to the Financial Times.
“Substantial real resources to what is currently available” should be added by governments, Lagarde told the German Council on Foreign Relations, by adding the remaining resources of a bailout fund set up in 2010 – the $573 billion European Financial Stability Facility (EFSF) – into a permanent fund, the European Stability Mechanism (ESM) that officials hope to roll out by the middle of 2012, the New York Times reported.
The ESM was on the agenda for today’s meeting in Brussels. At $651 billion dollars it is unlikely to be hefty enough to provide big rescue packages for Italy and Spain should they be needed.
Lagarde said the global economy faced a “defining moment,” and called on euro zone governments to consider financial risk-sharing steps like common euro zone bonds as a way to tackle the 17-member currency bloc’s sovereign debt crisis, Reuters reported.
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The IMF has helped to fund a number of euro zone rescue packages since the debt crisis began two years ago, providing about a third of the cash for bailouts in Portugal, Greece and Ireland.
It wants to bolster its lending capacity (currently estimated at around $380 billion) now that large European countries like Italy are under threat, according to Reuters.
Euro zone members have agreed to provide up to $200 billion, but the US, Canada, Japan and China – wary of injecting further funds – are keen to see what steps Europe will take to effectively tackle its debt crisis first.
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