On Tuesday Europe’s finance ministers agreed to increase the firepower of their rescue fund to help solve Europe’s debt crisis. But as their meeting progressed in Brussels it became clear that the financial reserves of the EFSF rescue fund are inadequate and falls short of the 1 trillion needed to backstop the European Union’s most indebted nations.
Europe’s ministers may look to the IMF for additional financial support in the near future.
” We will have to look at the IMF which can also make available funds for the emerging fund. I think countries in Europe and outside of Europe should be prepared to give more money to the IMF ” Dutch Finance Minister Jan Kees de Jager told reporters in Brussels.
During the G20 Summit in Cannes in early November, leaders from some G20 nations such as China, Brazil, and Russia were cautious and reluctant to fund Europe’s bailout rescue package but they expressed interest in providing future financial assistance to Europe through the IMF.
Currently, China contributes a modest level of IMF funding but they may be more willing to contribute higher levels of capital to a new IMF rescue fund for Europe if the European Central Bank demonstrates a commitment to focus less on austerity cuts and fiscal belt tightening and more on solving Europe’s spiraling debt crisis through a capital infusion.
According to the IMF’s website, the IMF’s total quotas as of 8/18/11 was $383 billion. If the IMF agrees to assist in a new bailout package for Europe, the IMF will not only need a capital infusion from potential lending nations such China, Russia, and Brazil. The IMF will also need a capital infusion from the Europe Central Bank (ECB) which is constrained in treaty from loaning directly to their governments.
Unlike the Federal Reserve in the United States, the ECB lacks the mandate to print money. However, the European Central Bank has the power to loan money to the IMF which can in turn be applied to assist indebted euro zone countries. This plan is being widely discussed among European economists and may prove to be the winning solution to provide the needed firepower to backstop Europe’s flaring debt problems.
The ECB can also lower interest rates in the EU which will lower borrowing costs and help alleviate some of the financial strains in the euro zone that limit growth.
S & P Downgrades Some of the World’s Largest Banks
The S & P has lowered the credit ratings of some of the world’s largest banks. Bank of America, Citi, and Goldman Sachs were downgraded from A to A-.
JP Morgan was lowered to A from A+. UBS and Barclays were lowered to A from A+ while HSBC was lowered to A+ from AA (-).
Meanwhile, China’s largest banks including Bank of China and China Construction Bank were upgraded to A from A- by the S & P.