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AFP
Wednesday, Nov 30, 2011

BRUSSELS - Eurozone finance ministers turned to the IMF for more help to keep the eurozone together on Wednesday after missing their goal of boosting their own bailout fund to one trillion euros (S$1.73 trillion).

With fears rising that Italy will need a bailout after its borrowing costs soared to record heights, ministers were searching for ways to control the rapidly worsening crisis now threatening the entire world financial order.

One minister acknowledged explicitly that the EU's EFSF rescue fund alone would not be able to carry all the problems.

"We are now looking at a true financial crisis - that is broad-based disruption in financial markets," said Bank of France governor and a member of the European Central Bank governing council Christian Noyer in Singapore. "We are facing a financial crisis, not a monetary one."

Ministers from the 17-nation eurozone gave their rescue fund, the 440-billion-euro European Financial Stability Facility (EFSF), new weapons as part of efforts to increase its firepower but they were unable to obtain their targeted total.

"We haven't lowered our ambitions but the conditions have changed, so it will probably not be one trillion euros but less," Luxembourg Premier Jean-Claude Juncker, head of the group of eurozone finance ministers, told reporters.

Asian markets mostly slipped on the news following two days of gains - Tokyo and Seoul each down about half a percentage point, with Hong Kong losing 1.92 per cent and Shanghai giving up 3.0 per cent.

The EFSF has helped Ireland and Portugal but is deemed too small to save Italy and Spain if the crisis brings these countries to their knees.

The ministers agreed to allow the fund to guarantee 20-30 per cent of potential losses incurred by investors who buy bonds of governments in financial trouble. They also decided to create co-investment funds to attract top-up public and private investment.

But EFSF chief Karl Regling warned: "All of this is unpredictable, and market conditions will also change over time, so that's why it's not possible to give one number."

With Germany opposed to allowing the ECB to act as a lender of last resort, by buying up government debt massively and indirectly financing government spending, the eurozone is looking to the IMF for help.

"We agreed to rapidly explore an increase of the resources of the IMF through bilateral loans," Juncker said, adding that the goal would be to allow the IMF to match the firepower of the EFSF and cooperate more closely with it. Raising the IMF's resources is a source of discord between Europe and its main international partners - most notably the Washington institution's paymaster, the United States.

"I think both European and non-European countries should be ready to increase resources through the IMF so that we have enough resources in total," said Dutch Finance Minister Jan Kees de Jager.

EU Economic Affairs Commissioner Olli Rehn said the bilateral loans would be provided by European states at this stage and that there were no plans for the participation of a European institution.

Some ministers also suggested that the ECB could play a bigger role in the crisis by providing loans to the IMF, which would then give aid to eurozone nations hit by the crisis.

"The EFSF alone will not be able to solve all those problems, we have to do it with the IMF and with the ECB," said Luxembourg Finance Minister Luc Frieden.

Belgium's Didier Reynders added: "It is for the ECB to take the decision."

The aim is to circumvent a ban on the ECB providing direct aid to countries in trouble.

The IMF, which itself does not have unlimited funds, denied on Tuesday that it was in talks with either Italy or Spain to provide financial assistance, amid persistent speculation that it would intervene to help them.

European leaders, who will hold a summit on December 8-9, are facing pleas from all corners of the world to contain a crisis that is also threatening to engulf Spain and is also stalking France.

Ministers agreed to finally release their share of a long-delayed 8.0-billion-euro bailout loan tranche to Greece.

But Italy's borrowing costs shot above 7.0 per cent on Tuesday, a level considered unsustainable.

The new Italian premier, Mario Monti, presented his reform plans to finance ministers but the European Commission warned that Italy needed to do much more still.

An audit report drafted after an EU mission to Rome said high borrowing rates could provoke a liquidity crisis which "could then turn into a solvency crisis, whose repercussions for other large euro area countries would be very acute."

Italy has debt of nearly 2.0 trillion euros and must repay about 400 billion euros ($532 billion) next year.