$2tn global rescue package hinges on action in Europe, before other countries would consider additional IMF contributions
Leading economies said on Sunday that the eurozone must bolster its firewall around the embattled single currency before they will agree to provide more funds for a planned $2tn (£1.3tn) global rescue package for the bloc.
At a meeting of finance leaders of the G20 group of major national economies plus the European Union in Mexico City, the eurozone countries promised that they would over the next month reassess the strength of their bailout fund, a step which could re-assure other countries so they agree to pay more into the International Monetary Fund.
"This [eurozone move] will provide an essential input in our ongoing consideration to mobilise resources to the IMF," the G20 said in the final communique of the two-day meeting.
Germany, as Europe's largest economy, came under intense pressure to support enlarging the firewall. But facing political hurdles at home, it has sent conflicting signals over whether it was ready to move.
Britain's chancellor, George Osborne, joined US Treasury secretary Timothy Geithner and other leading ministers in calling on euro members to put more funds into the European stability mechanism (ESM), the fund set up to bail out eurozone nations struggling with their sovereign debt, in order to stop the debt crisis spreading. Osborne said: "Until we see the colour of their money, I don't think you are going to see any [IMF] money from the rest of the world."
Geithner said Europe had come a long way in laying the foundations for a "credible" crisis response but could not rest there, while Russia and Brazil also came out for more eurozone action. Brazilian finance minister Guido Mantega said: "Emerging countries will only help under two conditions: first that they strengthen their firewall, and second for the IMF [voting rights] reform to be implemented. I see most countries sharing a similar opinion that the Europeans have to strengthen their firewall."
An agreement by Europe to merge its temporary bailout vehicle, the European financial stability facility, with the permanent one, the ESM, would create a $1tn war chest and open the door for other G20 countries to meet the IMF's request for $500bn-$600bn in new resources, on top of its current $358bn in funds. This would create around $1.95tn in firepower.
Germany, the euro bloc's paymaster, has so far resisted calls for a bigger ESM. However, its finance minister, Wolfgang Schäuble, whose government has taken a tough public line on aid for Greece, did hint that its position could be reviewed when European leaders discuss the issue next month. It will also be debated at a European Union summit on Thursday.
"The month of March goes from March 1 to March 31. It will be reviewed again, also in the light of the developments that have since occurred, whether the stated dimension of the [European bailout] mechanism is enough or not," Schäuble told reporters.
Some G20 negotiators were optimistic that Germany would soften its line in order to make the deal. "Everyone in the eurozone and even in the European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March," said Margrethe Vestager, economy minister of Denmark, currently the EU rotating president.
The EU economic and monetary commissioner, Olli Rehn, was asked in Mexico on Sunday if he expected a deal to combine the funds at the summit. He said: "In the course of March I expect a result."
Another important stage in finding a solution for the euro crisis will come on Wednesday when Mario Draghi, the president of the European Central Bank, makes another tranche of cheap money available to the eurozone's struggling banks. The first so-called longer-term refinancing operation in December saw the ECB providing €498bn and has been credited with restoring calm to the financial markets. Some experts believe demand for the loans could be even higher this time, possibly reaching €700bn.
The German government faces public opposition to the €130bn bailout package for Greece agreed last week – the country's second in two years – and has balked at enlarging Europe's rescue fund, on the grounds that this would undermine efforts to impose fiscal discipline on indebted countries.
The second Greek bailout package needs the approval of Germany's parliament, the Bundestag. Politicians will vote on Monday and it is expected to pass with opposition support. However, a poll in the Bild am Sonntag newspaper on Sunday showed 62% of Germans oppose further aid for Greece.