Friday, October 14, 2011

U.S. via IMF and BRIC Nations Set to Prop Up European Rescue Fund

Markets were very happy this morning on news reports that both BRIC nations and the U.S. itself (via IMF, which it has a large funding stake in) were prepared to contribute to the European rescue fund.  Since the IMF is a mystery to Average Joe, most won't realize U.S. tax dollars are going in this direction...

Here is the Geithner interview - 15 minutes, email readers will need to come to site to view

  • The U.S. plans on being an active partner as efforts intensify to get Europe get back on its feet financially, Treasury Secretary Timothy Geithner told CNBC Friday.  With global leaders preparing for next month's G-20 summit in Cannes, France, the International Monetary Fund — of which the U.S. is the greatest contributor — is being relied on to help underwrite whatever efforts are needed to backstop toxic European sovereign debt.
  • Geithner said the IMF has "very substantial" resources to fund a device that could look like the Troubled Asset Relief Program, which helped navigate American financial institutions through the crisis in 2008 and 2009.  "Through the IMF, of course, we're already playing a very major role," he said in a live interview in Paris. "We're happy to see the IMF continue to play that role in support of a more forceful, comprehensive strategy where Europe's own resources—very ample resources—are deployed on a much more substantial scale."
  • Geithner declined to give a specific number on what would be required to aid Greece and any other potential countries that need help meeting their obligations. Estimates have run as high as $2 trillion for a liquidity fund, and Geithner said that whatever the figure is, it should leave no doubt that there will be more than enough.  "A basic rule of financial crises management is you want to make sure you have a level of resources that are larger than the potential need you face," he said. "If markets see that then they'll have the incentive to continue to lend, invest, to get more exposure to those countries."

Very very similar language in this story late yesterday on the role of some of the BRIC nations.... the last sentence is the funniest one.  Essentially rather than China giving money directly to European banks the path is China--->IMF---->European country--->European bank

  • Emerging market countries are working on ways to contribute money rapidly to expand the effective firepower of the International Monetary Fund, with the aim of increasing its role in combating the eurozone sovereign debt crisis.
  • The discussions, in parallel with talks in the eurozone about creating a bigger “bazooka” to intervene in financial markets, are aimed at producing a confidence-boosting announcement by the Group of 20 heads of government summit next month.
  • People familiar with the discussions say governments are considering either funding an IMF-run special purpose vehicle (SPV) or lending to the IMF by buying special bonds. Although details have not been worked out, the increased firepower could be used to finance new IMF credit lines to prevent contagion from the Greek crisis spreading to Italy and Spain, or to recapitalise European banks.
  • A European official said: “We’re increasingly coming to the view that the eurozone crisis is too big a problem for Europe to solve on its own. If you want to sort it out properly you need American and Chinese money, which means the IMF.”
  • The Bric (Brazil, Russia, India, China) countries favoured a procedure used in 2009 when individual governments pledged to buy special bonds issued by the IMF, a person familiar with the Brazilian view said.
  • IMF staff have produced a range of options at the behest of emerging market governments, of which two are most likely. One is an SPV that would lend money under the auspices of the fund, but would take in money separately to the normal government contributions to the IMF.  The second is the bilateral option currently preferred by the Brics.
  • Eswar Prasad, formerly head of the IMF’s China division, said the proposals would allow big emerging market countries to help bail out Europe without buying eurozone sovereign bonds directly, which would expose them to loss. The plans could also be wound up after a number of years.  “The emerging markets have now found ways of donating money to the IMF which are likely to be domestically politically acceptable,” Mr Prasad said.
  • Another person familiar with the discussions said the money could be used for public bank recapitalisation. “This solves the ownership problem of China buying big stakes in a European bank,” he said. “Instead, China gives money to the IMF; the IMF to France; and France to its banks.”

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