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G20 split on IMF funds, urges eurozone to sort debt crisis

By Alvise Armellini Oct 15, 2011, 17:20 GMT

Paris - The Group of 20 (G20) major economies urged the eurozone Saturday to quell its debt crisis to prevent global knock-on effects, but remained split on whether the International Monetary Fund (IMF) should come to the rescue with bigger bailout funds of its own.

EU officials are working on a plan, expected to be endorsed by an October 23 summit, hinging on bank recapitalizations, further debt relief for Greece, strengthening eurozone discipline rules as well as bolstering euro bailout facilities.

'We look forward to further work to maximise the impact of the (eurozone bailout fund) to avoid contagion, and to the outcome of the (EU summit) to decisively address the current challenges,' G20 finance ministers and central bankers said after a two-day meeting in Paris.

Plans are afoot to stretch the 440-billion-euro (607-billion-dollar) lending power of the European Financial Stability Facility (EFSF) by letting it guarantee 20 per cent of bond issues from troubled eurozone governments, EU officials said Friday.

That would multiply the EFSF's effectiveness fivefold - ensuring sufficient financial firepower to shield not just Greece, Ireland and Portugal, but also larger eurozone economies such as Spain and Italy.

EU top officials hinted last week they would have also liked the IMF to boost its bailout funds, while the Financial Times (FT) reported ahead of the Paris talks that China and Brazil were willing to oblige, in return for more representation in international financial institutions.

But on Friday, the US and Germany shot down the idea, saying that the IMF had enough as it was.

'This debate exists,' said French Finance Minister Francois Baroin, whose country holds the G20 presidency, adding that the offers of additional funding were opposed by the 'clear position of a large country, the United States.'

The final G20 communique stuck to stating that the IMF should have 'adequate resources,' and indicated that 'discussion' over this would take place at a summit in Cannes, France, on November 3-4.

Baroin also confirmed that the eurozone was looking at forcing banks to accept bigger losses on loans extended to Greece - on top of the 21-per-cent haircut that was proposed to them in July.

'We will have an agreement on that issue. To tell you today the figure that we will arrive at would go against the schedule of the negotiations,' he said.

The issue is sensitive for French banks, which are among the most exposed to Greek sovereign debt. On Friday, rating agency Standard and Poor's downgraded France's biggest lender, BNP Paribas, partly out of such concerns.

But Baroin dismissed criticism - relayed to the FT by Charles Dallara, the US banker which negotiated the original 21-per-cent haircut with the EU - that imposing a bigger Greek haircut would drive investors away from other tottering eurozone economies.

'We will refuse all solutions that lead to a credit event,' he said, referring to an outcome that would trigger a default-like outcome and likely fuel market panic.

The G20 also backed European plans to shore up banks against Greek losses by making sure they boost their capital positions. 'We will ensure that banks are adequately capitalized and have sufficient funding to deal with current risks,' its statement said.

'We will solve the problems in the euro zone,' assured German Finance Minister Wolfgang Schaeuble. 'I believe we are well on our way.'

With several large economies trapped in austerity and at risk of recession, the G20 urged export countries such as Germany, China and Brazil to help prop up a faltering global recovery by boosting their internal demand.

The G20 text, hinting at US perceptions that China is unfairly undervaluing its currency, also called for emerging countries to work 'toward more market-determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals.'

'A successful global response would be strengthened by more progress toward domestic demand-led growth in the major emerging market economies and a more rapid pace of exchange rate appreciation by China,' US Treasury Secretary Timothy Geithner insisted.

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