IMF head seeks larger rescue fund

BERLIN - Agence France-Presse

IMF head Lagarde delivers a speech at German Council on Foreign Relations in Berlin. REUTERS photo

The International Monetary Fund head Christine Lagarde set out yesterday a raft of proposals to fight the eurozone crisis, including a bigger rescue fund, lower ECB rates and eurobonds as she warned of dimmer world growth prospects.

In a wide-ranging speech at the German Council on Foreign Relations think tank in Berlin, Lagarde also called for an additional $500 billion for the IMF as it seeks to keep afloat countries battered by the crisis.

And she had a dire warning for policymakers if they failed to do what was necessary, saying the world could slide into a “1930s moment” of isolationism, which led to the Great Depression and eventually to world war.

On the eurozone, Lagarde acknowledged that a great deal had already been accomplished but that the policies agreed so far “form pieces, but pieces only, of a comprehensive solution.”

She said the crisis-wracked eurozone had to focus on rediscovering growth as well as bolstering its defenses against contagion from the debt turmoil and pulling closer together politically and economically.

To spur growth, she called indirectly on the European Central Bank to lower interest rates, already at a record low. With inflation falling sharply, “additional and timely monetary easing will be important,” she said.

“We need a larger firewall,” she added. “Without it, countries like Italy and Spain that are fundamentally able to repay their debts could be forced into a solvency crisis by abnormal financing costs.”

She proposed “folding” the leftover cash in the eurozone’s current rescue pot, the EFSF, into the permanent ESM bailout fund when the latter comes into force, likely in the middle of this year.
However, departing from the text of her speech, she stressed: “I am not talking about doubling” the 500-billion-euro ESM as reportedly wanted by Italian Prime Minister Mario Monti.

In addition, Lagarde said the ECB should “provide the necessary liquidity support to stabilise bank funding and sovereign debt markets.”