MEXICO CITY - The world’s leading economies worked on Sunday to line up a deal on a second global rescue package worth nearly $2 trillion to stop the euro-zone sovereign debt crisis from spreading and putting at risk the tentative recovery.
Germany said it would make a decision some time in March on
By combining new and existing resources to create a nearly $2 trillion package, the G20 would strengthening Europe’s bailout fund, a move other Group of 20 countries say is essential to clear the way for throwing extra funds into the International Monetary Fund in April. The IMF would use those funds to strengthen its firepower to handle crises.
The twin proposals, being discussed at a meeting of Group of 20 finance chiefs in Mexico City, would build up massive international resources and aim to convince financial markets that the euro zone’s deep problems can be stemmed. send its boldest message since 2009, when it mustered $1 trillion to help rescue the world economy.
The G20 communique to be issued later on Sunday, a copy of which was seen by Reuters, says Europe’s decision on whether or not to put up more money will represent “essential input” for the separate discussion on whether other countries, like China and Japan, will contribute more funds for the IMF’s war chest.
One official said there had been debate between the United States and Europe over whether the final communique should say an increase in the firewall was “essential” or just “important“ to secure more IMF resources.
The G20 countries will meet again in Washington in late April to take up the issue.
British finance minister George Osborne stood firm on the need for a clear euro-zone commitment.
“We are prepared to consider IMF resources but only once we see the color of the euro-zone money, and we have not seen the color of the euro-zone money,” he told Sky TV. “I think that quid pro quo will be clearly established here in Mexico City.”
Germany, however, has taken a tough public line on limiting public funds used for bailouts. A government official close to Chancellor Angela Merkel insisted on Sunday that there is already enough money pledged for the euro-zone’s rescue fund, known as the European Stability Mechanism. Berlin has said it sees no need to combine the ESM with a temporary fund, the European Financial Stability Fund.
“The German government’s position is unchanged: we see no need to increase the upper limit of the ESM,” said the official in Berlin.
But different signals emerged from G20 negotiators in Mexico City, where Germany appeared more conciliatory behind closed doors.
“Everyone in the euro zone and even in European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March,” Margrethe Vestager, economy minister of current EU president Denmark said on Saturday.
Other G20 officials, however, were less convinced that Germany would agree to combining the two funds, which would build a $1 trillion firewall to stem contagion.
German Finance Minister Wolfgang Schaeuble said European leaders will tackle the adequacy of the firewall during March. The issue is on the agenda of a European Union summit this week.
The German government faces public opposition to a second Greek bailout and has balked at enlarging Europe’s rescue fund on the grounds that it would undermine efforts to impose fiscal discipline on indebted countries.
The second Greek bailout package, recently agreed in principle, needs the approval of Germany’s parliament, the Bundestag. Lawmakers will vote on Monday and it is expected to pass with opposition support. But a poll in the Bild am Sonntag newspaper on Sunday showed 62 percent of Germans oppose further aid for Greece. de
An agreement by Europe to merge its temporary and permanent bailout vehicles for a war chest of about $1 trillion would open the door for other G20 countries to meet the IMF’s request for $500-$600 billion in new resources, on top of its current $385 billion in funds.
Put together, this would total almost $2 trillion in firepower.
But the G20 has no intention of easing its pressure on Europe by giving it a strong signal now that new IMF money is in the bag.
U.S. Treasury Secretary Timothy Geithner said on Saturday that Europe had come a long way in laying the foundations for a “credible” crisis response but could not rest there.
“It’s important not to rest on that progress... That progress is in part based on expectations of more progress to come,” he said.
Regardless of Europe’s decision on its firewall, the United States has said it will not contribute more to the IMF this year, putting the onus on countries such as China and Japan as well as leading European economies.
Others also left no doubt the cash is needed to calm markets and secure economic growth. “In order to overcome the crisis, you have to get ahead of the curve and have a big enough bazooka,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.
Japan’s Finance Minister, Jun Azumi, said his country stood ready to contribute IMF funds once Europe has acted.
“I expect debate on strengthening of the IMF lending capacity will progress on condition that the problem of Europe’s debt crisis is put to an end by the G20 meeting in Washington in April,” he said.
Finance chiefs in their communique on Sunday will also cite rising oil prices driven by geopolitical risks as a threat to a tentative world recovery, diplomatic sources said.
The price of oil vaulted over $125 a barrel on Friday, the highest level in nearly 10 months on concerns over Iran’s nuclear ambitions.
Oil-producing members of the G20 said on Saturday they would take measures to avoid a rise in petroleum prices from hurting the world economy, Italy’s deputy economy minister said.