No G20 deal on IMF cash this weekend, pressure on Europe
By Luis Rojas and Alonso Soto
MEXICO CITY (Reuters) - World economic powers told Europe on Friday it would have to do more to fight its financial crisis before they agree to provide back-up in the form of a bigger IMF war-chest.
Finance ministers and central bankers from the Group of 20 top economies are gathering in Mexico City with Europe hoping that China, Japan and others will soon commit to giving the International Monetary Fund more money so it can help euro zone countries which suffer a cash crunch.
But many G20 countries are insisting that Europe needs to take the first step by bolstering its own bailout funds.
"I expect no decision at the G20 summit on boosting the IMF's resources," said Jens Weidmann, head of Germany's central bank and a European Central Bank (ECB) Governing Council member.
The host of the weekend's meetings, Mexico's finance minister, Jose Antonio Meade, said it was "still early in the process" to discuss specific amounts and ways that G20 nations could commit more money.
The world's rich countries have used the G20 to coordinate their response to the financial crisis that erupted in 2008 after the collapse of the U.S. housing bubble and then spread to Europe where many countries are saddled with heavy debts.
As the crisis has dragged on, however, divisions over how to tackle it have deepened. The IMF wants to raise as much as $600 billion in extra resources to help deal with fallout from the euro zone debt crisis, but the plan faces resistance from countries including the United States and Canada.
The United States has told Europe to do more on its own and also made clear it will not provide more cash to help the IMF handle the crisis.
"What we don't want to see is the IMF substitute -- and it really cannot substitute -- for a stronger European response,"
Treasury Secretary Timothy Geithner told CNBC television.
Even if it wanted to, President Barack Obama's administration would have little or no chance of getting Congress' approval in an election year to send more cash to help out Europe.
U.S. reluctance has put the onus on Europe's richest countries plus China, Japan and others to raise the funds.
EU leaders will meet next week to discuss boosting their own bailout funds. Even G20 countries that are willing to help are unlikely to promise more money until Europe proves it is acting to help itself.
"The problems many countries are facing today have a solution if they act decisively and in time," said Mexico's central bank governor Agustin Carstens. "If this is done sooner rather than later we will see a promising future for the global economy."
GERMANY HITS BACK
Germany has come under pressure with critics saying it could
do more to help its struggling European partners and that its insistence on fiscal belt-tightening risks plunging Greece even deeper into crisis.
Weidmann hit back on Friday, saying Germany was already financing a "disproportionately large share" of rescue efforts to date and that its insistence on budgetary discipline was aimed at ensuring a stable monetary union.
He said there was a popular misconception that Germany had managed to "dodge the flames of the current crisis ... (and) ... is now selfishly refusing to come to the aid of the stricken countries by acting as chief firefighter."
Mark McCormick, a currency strategist at Brown Brothers Harriman in New York, said the long-term answer to Europe's problems would require further progress on a common approach to running national budgets.
"Money from the G20 via the IMF buys them a bit more time," he said.
Some member countries will push the G20 this weekend to at least outline the mechanisms it would use to help.
"Since we might not be able to finalize any numbers, money pledges by individual countries, we should not waste the opportunity to move forward," said Paulo Nogueira Batista, Brazil's representative at the IMF.
The next opportunities for the G20 to agree on more funds for the IMF are most likely to be in April, at the twice-yearly Fund meetings, or in June, when G20 leaders meet in Mexico.
While policy makers squabbled over whether and how to boost the IMF's firepower, a group of international bankers joined calls for the G20 to work harder to boost growth, warning that the euro zone crisis threatens to hit the global economy.
Governments should also take a slower approach on tough new financial rules, the Institute of International Finance said on the eve of the G20 meeting here.
The IIF welcomed the progress Europe has made in addressing its sovereign debt problems through an emergency bailout fund, central bank liquidity, and toughened fiscal rules. But it cautioned that budget cutbacks in weaker countries like Greece and Spain could severely damage long-term growth prospects.
"While necessary, fiscal austerity will in the short term weigh on already sub-par growth," it said. "Mitigating the impact of fiscal austerity is key."
(Additional reporting by Stella Dawson and G20 reporting team; editing by Kieran Murray andWilliam Schomberg)
Eyes on Europe to keep risk rally alive
LONDON (Reuters) - The spotlight shines on Europe in the coming week as the ECB feeds banks a second huge helping of three-year funds and the region's leaders meet to strengthen the financial firewalls needed to contain the debt crisis.
Manufacturing data from the giant U.S. and Chinese economies will be scrutinized for any signs of flagging growth, while rising oil prices and the battle to implement Greece's second bailout deal will color the market backdrop.
Riskier assets have enjoyed nearly two months of gains, driven by renewed bouts of monetary easing from the world's major central banks and hopes of economic recovery.
Global equities are up over 20 percent from October lows .MIWD00000PUS, while 10-year Italian bonds have returned 15 percent to dollar-based investors this year.
But the sentiment behind the rally is seen as increasingly fragile.
"There's this fear of missing out that has prompted a lot of investors to buy, but the minute anything looks remotely negative they'll get out," said Jeff Sica, President and Chief Investment Officer of SICA Wealth Management.
In the coming week, risk assets should get some support from the European Central Bank's second long-term funding operation on Wednesday, when European banks are expected to borrow up to half a trillion euros ($666 billion) of cheap cash.
Euro area money supply data for January, due on Monday, should offer an indication of how successful the ECB's first three-year tender in December was in easing the credit freeze.
It was widely credited with reversing a slide in Europe's financial markets, easing pressures on the banking system and bringing down borrowing costs for struggling euro zone states like Italy and Spain.
The second three-year offering may well be the last, especially if its effects endure.
"Unless the euro crisis deteriorates significantly further, another large LTRO after this seems unlikely," said Deutsche Bank's chief economist Thomas Mayer.
Taken together, Mayer said, the two tenders may have shifted the momentum in the financial markets in a similar way to the impact of foreign exchange intervention, so any new impulse to sustain prices would not be needed.
BOLSTERING DEFENCES
But to safeguard the benefits, European Union leaders meeting in Brussels on Thursday and Friday will need to agree to improve their defense of the euro zone.
That means better economic policies and a beefed-up financial safety net, and proposals to combine region's two firewalls - the existing EFSF bailout facility and the permanent ESM fund due to come into effect by mid-year - will be at the core of the debate.
International Monetary Fund head Christine Lagarde has said that if the euro zone rolls the remaining EFSF funds into the ESM, then the IMF will be able to go on a fundraising tour of its members elsewhere in the world to increase its crisis-fighting capability too.
While markets await action by the EU's leaders, they will also track the next steps by Greece to meet the terms of its new 130-billion-euro bailout, which has so far only served to ease concerns of an imminent and disorderly debt default.
"A deal on Greece has not been viewed as a game changer by the markets," said analysts at Barclays Capital in a note.
"In our view, risk has not rallied further partly because the outcome was close to consensus expectations and many questions remain unanswered."
Efforts launched on Friday to get a high private creditor take-up of the bond swap element of the package will dominate the coming week and legislation to implement pension and salary cuts still has to pass through the Greek parliament.
Germany's parliament votes on the Greek bailout package on Monday.
GROWTH KEY
Further afield, investors will be watching out for more clues to the state of the world's top two economies.
Indicators of manufacturing activity will come from China, which releases its official Purchasing Manager's index on Thursday, and the U.S., due to unveil January durable goods orders data on Tuesday and the ISM factory activity barometer for February on Thursday.
The U.S. economy seems unaffected with its recovery driving share prices on Wall Street back to pre-Lehman crisis highs .SPX.DJI, but there are growing fears that activity across Asia is slowing as export orders from the euro zone weaken.
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Asset Performance in 2012: link.reuters.com/muc46s
Commodities in 2012: link.reuters.com/faz36s
Euro zone debt crisis: r.reuters.com/hyb65p
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Growing tensions between Iran and the West form another threat to the growth outlook, having fuelled recent strong gains in the oil price.
Brent crude in dollars has risen over 14 percent this year, while in euros the gains are slightly less at around 11 percent though back to levels not seen since 2008.
"There's no economic recovery with high energy prices," said fund manager Jeff Sica.
In debt markets, Spain, Italy, Germany, France and Belgium all hold auctions. All should go well, in some cases not least because banks will be able to use the bonds as collateral for accessing the cheap funds from the ECB.
($1 = 0.7511 euros)
(Writing by Richard Hubbard; Editing by John Stonestreet)
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