U.S. and IMF ~ Bailout for Europe?

December 2, 2011

U.S. explores new ways for IMF to aid Europe

The U.S. government is considering ways to help the International Monetary Fund bolster Europe’s crisis-fighting efforts, hoping to shield American taxpayers from footing the bill while addressing the risk posed by Europe’s faltering economy.

Treasury Secretary Timothy Geithner plans to begin a three-day trip to Europe on Tuesday, where he will meet with top officials from Germany, France, Italy, Spain and the European Central Bank. The Treasury Department on Friday said the trip would be "for discussions with his counterparts on their efforts to reinforce the institutions of the euro area."

President Barack Obama asked Mr. Geithner to visit the European officials, a senior Treasury official said, a sign of their mounting concern as the crisis worsens.

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Administration officials have been ramping up pressure on European leaders to take stronger action as the debt crisis in the 17-nation currency bloc weighs on the U.S. recovery and threatens to spark a new global financial crisis.

Obama administration officials are pressing European leaders to build a larger firewall to guard against debt woes spreading from Europe's most troubled economies, particularly Italy and Spain.

The meetings come ahead of a highly anticipated summit of European officials on Thursday and Friday in Brussels, where the euro zone's leaders are expected to take new steps to fight the crisis.

The latest U.S. efforts come as the IMF enters its highest-profile role of the crisis next week when it starts a closer monitoring of Italy's budget soon after Italy's new prime minister, Mario Monti, presents new austerity proposals on Monday.

The expanded IMF oversight—one of the key concrete steps to emerge from last month's summit of the Group of 20 leading economies—was designed to bring a credible outside perspective to certify Italy's budget overhaul to investors and other European governments.

In this role, the IMF will produce quarterly reports on Italy's finances, though it isn't providing the country with emergency loans. The fund will thereby gain insight into how outside aid to Italy, if needed, could be structured.

The move comes as many European officials call for the IMF to put up more money to help fight the crisis. The U.S. controls about 17% of the IMF's shares, making it the largest individual shareholder and a key force in determining the fund's involvement.

The IMF today has about $390 billion in uncommitted money available to lend, or roughly half of its total resources. That is plenty for its usual role of aiding smaller countries in a financial crisis, but hardly enough to rescue Italy and Spain, the euro zone's third- and fourth-largest economies.

"Money in the IMF is very limited," said Desmond Lachman, a fellow at the American Enterprise Institute and former IMF official. "The IMF is going to play a part, but it's a small part."

The U.S. has resisted calls for the IMF to step up with more funds until the euro-zone powers overcome their reluctance to put forward more of their own.

Germany, for instance, has long opposed an enlarged role for the European Central Bank, rebuffing calls from the U.S. and many European officials for the ECB to take more definitive action akin to the Federal Reserve's role rescuing financial firms during the U.S. financial crisis.

This week, European officials agreed to pursue more options involving the IMF. They include bilateral loans from European nations to provide the IMF with more money—in a way that wouldn't require the U.S. to put up its own funds—into a special pool of money earmarked for the euro-zone crisis.

An IMF spokesman, Gerry Rice, said on Friday that "the European authorities—like some other IMF member countries—are exploring bilateral loans to the IMF," including loans from national central banks.

European officials are also weighing a plan that would involve the IMF creating more of its artificial currency, called special drawing rights, or SDRs, to be distributed to all member nations to give European countries more firepower to fight the crisis.

Some officials are also exploring the potential for the ECB to step up its role in fighting the crisis by lending to the IMF, allowing the fund to carry out a rescue program with that money. That could address the IMF's funding limitations while giving European officials a sense of security that an outside entity would enforce tough conditions on Italy or other recipients. But it is unclear whether the ECB would be willing to provide funding in such a fashion.

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