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
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.
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"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
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:
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