The G20 summit in Cannes ended in discord today after the United States effectively vetoed a grand plan, pushed by European and emerging market countries, to beef up the resources of the International Monetary Fund and provide a convincing international backstop for troubled eurozone economies.
The communiqué released said that world leaders “stand ready” to ensure that the IMF has additional firepower in order to assist stricken nations, but it included no specific figure to which the Fund’s existing resources would be increased. The failure of the summit to agree on a hard number for the expansion of the IMF’s lending power caused Italian interest rates to jump dramatically today, reflecting rising fears among investors that the eurozone’s third largest economy might not be able to finance its €1.8trillion debt pile.
The absence of a specific sum in the collective statement is a particular blow to David Cameron and George Osborne who had pushed for the G20 to put a hard number into the report in order to send a calming message to financial markets, which have been thrown into panic this week by the political chaos in Greece. Instead, the communiqué pledged merely to ask G20 finance ministers to consider ways in which IMF resources could be increased.
Markets responded with dismay at the failure of the G20 to produce a convincing plan. Italian bond yields hit 6.4 per cent at one point in trading, which is well above the level that economic analysts believe is sustainable for Rome to service. This was despite a pledge by Italy, contained in the communiqué, to allow the IMF to examine its national finances on a regular basis to ensure that the country is acting to reduce its levels of borrowing.
A senior source in the IMF indicated tonight that the US resisted attempts by Britain and other European nations to put a concrete figure in the final communiqué. President Barack Obama insisted in a press conference torday that the US was not opposed to using the IMF to help troubled eurozone nations, but that it must not be a substitute for efforts by Europeans to solve their own sovereign debt crisis. He said: “Creating additional tools for the IMF is an important component of providing markets overall confidence in global growth and stability. But that is a supplement to the work that is being done here in Europe.”
Despite the opposition of the US, the plan to increase the resources of the IMF by a specific amount had actually enjoyed a wide range of support. In the developing world, Mexico, Brazil and China had all indicated their willingness to increase their respective pledges to the IMF significantly. The Australian Prime Minister, Julia Gillard, had also been in favour.
The summit’s host, Nicolas Sarkozy, had also thrown his weight behind the proposal after acknowledging that his own plan, put together in Brussels last week, to persuade the Chinese to invest in the European bailout fund, had not been successful. The German Chancellor, Angela Merkel, admitted today that there had been little interest from foreign states in the Brussels plan to bolster the European Financial Stability Facility (EFSF). She said: “There are hardly any countries that have said already they will cooperate with the EFSF”.
Mr Cameron and Mr Osborne had made it clear earlier in the week that they wanted the G20 to announce a specific figure on IMF resources. The Chancellor had told reporters in Cannes today: “A debate has begun, but not concluded on increasing the resources of the IMF…We’re now getting down to the nitty gritty of numbers.”
At the G20 meeting in London in 2009, hosted by the former Prime Minister Gordon Brown, world leaders announced that the resources of the IMF would be increased from $500bn to $750bn. That bold announcement is believed to have played a part in calming financial markets, which were then still in turmoil after the collapse of the US investment bank Lehman Brothers. That was a feat the UK government and others had hoped to repeat at Cannes.
The official resources of the IMF are $950bn, but due to programmes committed in recent years its present lending capacity is just $386bn. This sum is sufficient to help small countries, such as Greece, that fall into trouble. But the total capacity of the IMF at the moment would cover just 15 per cent of Italy’s sovereign debt pile.
The ending of the G20 without a clear plan to restore confidence takes global leaders into uncharted territory and threatens an escalation of the eurozone sovereign debt crisis. Mr Osborne said at the annual IMF meeting in Washington in September that “the eurozone has six weeks to resolve this political crisis”, indicating that markets needed to be convinced by this meeting in Cannes that world leaders had the situation in hand.
But Mr Cameron admitted today that the deadline had effectively not been met. He said: “I’m not going to pretend that all of the problems of the eurozone have been fixed. They haven’t”. Mr Cameron added that: “The problem is not that there isn’t a deal. The problem is that not all of the detail, all of the specifics, are in place.”
However, Christine Lagarde, the managing director of the IMF, argued today that the absence of a hard figure in the communiqué was not a problem. She said: "I go away with infinite resources. There is no cap, no floor on resources"
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