European leaders are looking outside the Continent for help solving the longstanding crisis over the euro, but while the International Monetary Fund maybe able to help, it will not be the magic wand they seek.
The fund may be asked to assist further as leaders of the 17 European Union nations that use the euro meet to prepare for a summit meeting on Thursday and Friday. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France are scheduled to hold talks in Paris on Monday, and, at the request of President Obama, Treasury Secretary Timothy F. Geithner is meeting with European leaders later in the week.
European Union leaders have already turned to the I.M.F. to assist smaller nations like Ireland, Greece and Portugal. In all three, the fund is providing about a third of the necessary loans and its expertise in guiding countries with solvency problems back to recovery. Last month, at the Group of 20 summit meeting in Cannes, the fund was also asked to monitor the economic, fiscal and structural reforms in huge and shaky Italy — not as a lender, at least not yet, but rather to lend its skills and credibility to the efforts of the new prime minister, Mario Monti, a technocrat.
The I.M.F. lacks the resources to create the much-discussed “firewall” to keep interest rates at sustainable levels for troubled euro zone economies. Italy and Spain together have total debts of more than $3.3 trillion, with Italy about to roll over $276 billion in debt over in the next six months and Spain about $150 billion. Just those two rollovers would wipe out the amount the fund has available to lend worldwide, about $400 billion.
European policy makers are looking to the fund to help ensure budgetary restraint while perhaps also serving as a vehicle for financing. The I.M.F. could raise or contribute its own money, or channel money from countries with surpluses, like China.
A senior Treasury official said that the I.M.F. might provide “additional, spare-tire capacity” by contributing some financing, but that Europe would primarily use its own resources to wrestle down interest rates and keep countries like Spain solvent.
“Europe is rich enough. It is not in net deficit, when you balance out all of the trade deficits and surpluses,” says Raghuram Rajan, a professor at the University of Chicago and former chief economist at the I.M.F. “What Europe needs right now is money that is willing to absorb losses — and the I.M.F. is not going to provide the money that absorbs losses.”
Analysts say that Europe will need to provide the bulk of that money itself: through the European Central Bank ; the European bailout fund, called the European Financial Stability Facility ; or transfers from fiscally sound countries like Germany.
Consideration of how to use I.M.F. resources and expertise started in earnest at the Cannes summit meeting in early November. Finance ministers were ordered to develop plans for “deploying a range of various options” for the fund to help bring down borrowing costs.
Some of the options appear to be more likely than others. One is a plan to have euro zone central banks lend money to the I.M.F. The fund could then provide lines of credit to countries struggling to finance their debts, and could participate in fiscal monitoring.
That plan is gaining support in Europe. “It is an easy solution because bilateral loans are coming from the central banks,” said Herman Van Rompuy, the European Union president, on Thursday, according to Bloomberg News. “They haven’t to ask for money from the taxpayer.”
A second plan under discussion would have the I.M.F. create new special drawing rights to grant to member countries. Countries hold the special drawing rights — an i.o.u. with a value based on a basket of major currencies — as reserves and can tap them in case of an emergency. The measure would be marginal and supplementary, given that the special drawing rights would be apportioned to members according to their contributions to the I.M.F. But by assuring investors that countries have the capacity to repay all loans, such additional special drawing rights could push down borrowing rates.
American agreement is necessary to increase I.M.F. funds, and in private conversations Treasury officials have ruled out that measure for now. Further, Mr. Obama is considered highly unlikely to ask Congress for extra money to bail out Europe, especially in an election year.
All the options under consideration are founded on the fund’s reputation for helping countries, albeit sometimes painfully, return to fiscal health and manage short-term liquidity crises.
The fund “brings money to the table,” says Edwin M. Truman, a former Treasury official and now at the Peter G. Peterson Institute for International Economics. “But it also brings credibility. The fund has been in the business of creating lending programs for decades. It has a reputation for being tough and unbiased.”
Some watchers wonder why the I.M.F. should be involved in aiding such rich countries at all.
“This is a European problem, and there is no strong rationale for I.M.F. lending,” said Simon Johnson, a former I.M.F. chief economist who also contributes to a New York Times blog, Economix. “Europe has lots of money and no balance of payments problem. The euro is a reserve currency. The Germans can do a lot themselves, and the Germans and the E.C.B. can do everything the I.M.F. can do.”
“There’s no justification under the I.M.F.’s articles for the I.M.F. to get involved in Italy,” said Andrew Hilton, director of the Center for the Study of Financial Innovation, in London, and a longtime fund watcher. He added that less-wealthy fund members, like Brazil, Argentina, Russia and India, would have legitimate complaints about bailing out more wealthy countries.
Still, further I.M.F. involvement seems very likely. In recent days, euro zone leaders have indicated support for a bolstered I.M.F. role in resolving the sovereign-debt crisis.
Luc Frieden, Luxembourg’s finance minister, said the European bailout fund and the central bank did not have the capacity to ease the crisis alone. “We have to do so together with the I.M.F. and with the E.C.B., within the framework of its independence,” he told reporters at a meeting of euro zone finance ministers.
Annie Lowrey reported from Washington, and Steven Erlanger from Paris.