Christine Lagarde, the managing director of the International Monetary Fund, yesterday pressured Europe's leaders to increase the size of the single currency's bailout fund in order to head off a disastrous escalation of the eurozone sovereign debt crisis.
The eurozone's temporary European Financial Stability Facility is due to be replaced by a permanent bailout fund, known as the European Stability Mechanism, this year.
But Ms Lagarde warned yesterday that the €500bn (£415bn) ESM will not be large enough to bail out all member states that could get into trouble. "Adding substantial real resources to what is currently available by folding the EFSF into the ESM, increasing the size of the ESM, and identifying a clear and credible timetable for making it operational would help greatly," said Ms Lagarde in speech in Berlin.
Ms Lagarde also advised stronger eurozone countries to delay their planned fiscal consolidations in order to sustain demand across the currency bloc. "Yes, several countries have no choice but to tighten public finances, sharply and quickly. But this is not true everywhere. There is a large core where fiscal adjustment can be more gradual. Those with fiscal place should support the common effort by reconsidering the pace of adjustment planned for this year," she said. She also suggested that Europe should consider jointly guaranteed euro bonds to complement the new fiscal compact.
The ESM, as presently planned, would not be large enough to fund a rescue of Spain or Italy. The latter needs to raise around €440bn in 2012 alone. The German magazine, Der Spiegel, reported at the weekend that the President of the European Central Bank Mario Draghi and the Italian prime minister Mario Monti have called for the ESM to be boosted to €1 trillion. Ms Lagarde stressed she was not pushing for a particular increase in the fund's size. But the IMF estimates a global financing gap of around $1trn over the next two years. The IMF will today downgrade its global growth forecasts for 2012. It now expects Italy to contract by 2.2 per cent and Spain by 1.7 per cent.