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Europe channels E150bn to IMF for crisis management

Europe has bolstered its anti-crisis arsenal, channelling E150 billion (R1.6 trillion) to the International

Monetary Fund (IMF) as the European Central Bank (ECB) widened its support for sagging bond markets.

Four EU countries not using the euro also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the E200bn target to ease the euro zone’s home-grown debt burdens. The UK would “define its contribution” early next year, finance ministers said yesterday.

The IMF track was “obviously a small-scale solution”, former UBS chairman Peter Kurer said on Bloomberg Television. “What really would be needed in the ideal world would be euro bonds or a substitute which can bring large-scale liquidity and confidence into the markets.”

Germany continued to oppose an early decision to raise the limit of E500bn on overall emergency aid. European leaders plan to tackle that question by March. Still, the IMF infusion and jump in ECB bond purchases indicated that Europe is wielding more money instead of relying on budget cuts alone to persuade investors to return to markets scarred by two years of burgeoning debt and threatened defaults.

The ECB said it had settled E3.36bn of bond purchases in the week to December 16, up from E635 million the week before. The ECB’s next crisis-fighting act was to come yesterday, when it offered banks unlimited three-year loans, lubricating the credit system with a flood of cash.

“I cannot put a figure to it, but I would think that it would be significant,” ECB vice-president Vitor Constancio said.

Bonds of Italy and Spain have rallied on expectations that the unprecedented long-term loans will lead banks to buy more government debt. Two-year yields have fallen to 5.2 percent in Italy from 6.2 percent when the plan was announced on December 8. In Spain, they dropped below 3.4 percent from 4.9 percent.

At the same time, ECB president Mario Draghi said the bond-buying operations would not go on forever, indicating that countries such as his native Italy could not count on massive interventions to reduce their borrowing costs.

The ECB will start in January to act as a market agent for the European Financial Stability Facility, the E440bn government-backed rescue fund set up in May 2010 and due to be replaced by a permanent fund next year.

Contributions to the IMF were controversial inside and outside the 17-nation euro zone. The most potent central bank among the single currency users, Germany’s Bundesbank, coupled its E41.5bn input to a promise that the aid not be earmarked for Europe.

Such recycling would violate euro rules, inspired by the Bundesbank, that bar central banks from financing government deficits. As a result, the euro area will lend to the IMF’s general resources, not to a special euro crisis fund.

France would supply E31.4bn, the statement said. Italy would deliver E23.5bn and Spain E14.9bn. The three countries drawing on emergency loans to escape default – Greece, Ireland and Portugal – were not asked to contribute.

The euro added 0.1 percent to $1.3010 at 9am in Brussels.

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  1. December 21, 2011 at 4:59 pm

    is it too delayed to call jinx?

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