Analysis: Deal building to pump up IMF to handle Europe fallout

Wed Nov 30, 2011 6:34pm EST
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By Lesley Wroughton

WASHINGTON (Reuters) - A deal is building to boost the International Monetary Fund's resources even as the world presses euro-zone leaders to put more of their own firepower on the line to defeat a debt crisis that threatens global growth.

Mexico, which assumes on Thursday the rotating presidency of the Group of 20 nations, said on Wednesday it would make increasing IMF resources a priority. IMF members agree the global lender needs more money to handle the fallout from the euro zone's fiscal mess.

The effort raises two issues: whether Europe is doing enough on its own to deal with the crisis and where the money for the IMF will come from.

Some G20 officials see increased IMF funding as a potential "grand bargain" in the making: Euro-zone leaders would commit to credible deficit-reduction plans and easier monetary policy, while countries with current account surpluses would pump more money into the IMF.

The motivation is to prevent Europe from pulling the rest of the world into a deep recession. Funding from the IMF, accompanied by ECB bond purchases, would buy euro-zone countries some time to put political mechanisms in place for strong fiscal discipline.

In a major development on Tuesday, euro-zone governments said they were looking at providing bilateral loans to the IMF from national central banks, a move that would mark a critical first step by Europe to meet international demands that it use more of its own money to tame the crisis.

Within the euro zone, lending through national central banks would circumvent any concern that the European Central Bank was funding profligate governments.

Making the IMF the sole task master for governments receiving aid could also bolster the credibility of austerity programs.   Continued...