Friday, June 22, 2012

IMF moves to protect Euro from Collapse

IMF's Lagarde Demands Action to Protect Euro

 
 

IMF's Lagarde Demands Action to Avert Threat to Euro

Published: Thursday, 21 Jun 2012 | 9:51 PM ET
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By: Reuters


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The International Monetary Fund urged the euro zone on Thursday to channel aid directly to struggling banks rather than via governments and called for the European Central Bank to cut interest rates, saying the future of the euro was at stake.
IMF headquarters
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The stark message from IMF Managing Director Christine Lagarde, delivered to euro zone finance ministers who met in Luxembourg, will increase pressure to forge a unified approach to tackling problems at struggling banks such as those in Spain.
"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," Lagarde told a news conference after the meeting.
"A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith," she said. "At the moment, the viability of the European monetary system is questioned."
Lagarde spelled out a plan that envisioned the issuance of jointly guaranteed euro zone debt as well as more centralized economic control in the 17 countries that use the euro.
As ministers prepared to provide up to 100 billion euros ($126 billion) in aid for Spain to shore up its stricken banks, Lagarde said financial support for banks should be given directly, rather than via the state.
Analysts believe such a model could entail allowing the euro zone's permanent rescue scheme, the European Stability Mechanism (ESM) to directly inject capital into banks in return for a shareholding, or to lend at penalty rate of interest.
"There must be a recapitalisation of the weak banks, with preferably a direct link between the European Financial Stability Facility(EFSF)/ESM and the banks, without going through the sovereign, in order to break the negative feedback loop that we have between banks and sovereigns."
Her comments mirrored an appeal made by the finance minister of Ireland, which was forced to take a state bailout to prop up its lenders.
"The experience of Ireland should have been learned by the European authorities. To recapitalise banks and to transfer the accounting of it onto the sovereign seems to be an additional burden," Michael Noonan told reporters at the meeting.
        
Creativity
Lagarde also called for the Frankfurt-based European Central Bank to carry out monetary policy with "sufficient creativity" to help the euro zone, and the IMF fleshed out that idea in a new report on the single currency area.
"The ECB has room, albeit limited, to ease policy rates and signal a commitment to a more accommodative stance for a prolonged period," the IMF said in the report.
The ECB left rates at 1 percent in early June and its president, Mario Draghi, says the onus is on the region's governments to act to boost confidence in a region with a slumping economy.
Still, many economists expect the ECB to cut borrowing costs in the coming months, and rate setter Ewald Nowotny has said the central bank has the ability to ease policy if the economy continues to weaken.
"If necessary, unconventional measures should be used. This means giving consideration to non-standard measures, such as the re-activation of the SMP, additional LTROs with suitable collateral requirements, or the introduction of some form of quantitative easing," the report said, referring to its programs of bond buying and longer-term loans.end quote from:

IMF's Lagarde Demands Action to Protect Euro

I think Lagarde may have the right idea of propping up the banks instead of the Sovereign nations. In the end, if the euro is going to work long term the European Union and not any single nation must be the Bulwark for it to work. So, right or wrong maybe the sovereign nations are going to disappear and only the banks and the european union will remain. Strange, but possibly true the way things are going. However, many european union nations are also very nationalistic so how this all will play out is anyone's guess.

 



 

 

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