The International Monetary Fund's bid to win a big boost in funding to handle the euro-zone debt crisis hit a speed bump on Thursday when Brazil demanded more power at the IMF for emerging economies as a condition for lending it extra cash.
Brazilian Finance Minister Guido Mantega laid out the terms for a deal after a meeting with fellow BRICS nations Russia, India, China and South Africa.
We are not ready to set a figure, because there are preconditions that have not been fulfilled by the countries - whether they will comply with the agenda of reforms, he said.
Support from China, Russia and Brazil is critical to strengthening the firepower of the IMF.
Its managing director, Christine Lagarde, wants at least $400 billion in extra funds to protect countries from any worsening of the euro zone debt crisis. So far, Europe and Japan have pledged $320 billion and the IMF is relying on the BRICS to plug the hole as it seeks to double its war chest.
Calling the euro zone the epicenter of potential risk for a world economic recovery that is timid and fragile, Lagarde had said earlier on Thursday she was working on a deal.
We expect our firepower to be significantly increased as an outcome of this meeting, she said at a news conference to kick off the spring meetings of the IMF and World Bank.
The IMF firewall would complement the $1 trillion in emergency funds for Europe agreed upon by the EU leaders last month. Lagarde welcomed those funds as a significant step toward addressing euro-zone problems but also urged the EU to use that money to directly inject capital into banks.
Finance ministers and central bankers from the Group of 20 advanced and emerging economies were holding a dinner on Thursday night, ahead of a longer session on Friday. IMF funding was at the top of the agenda.
A source from a major emerging economy said the BRICS were leaning toward contributing, but faced two hurdles. The group both wants more IMF voting power to reflect its growing sway on the world financial stage, and some countries also need to have any agreement approved by their capitols, the source said.
In another move that could complicate the funding drive, Canada was pushing to weaken Europe's dominant power on the IMF's 24-member board when votes come up on how to use the new resources. This would give more say to emerging economies.
Given that the major challenge here is a sovereign debt challenge in euro zone countries, and that euro zone countries are asking non euro-zone countries to contribute to resources at the IMF, our view is that there ought to be two votes, said Canadian Finance Minister Jim Flaherty.
Japanese Finance Minister Jun Azumi, whose country is contributing $60 billion to the IMF, said as he arrived in Washington that BRICS funding is indispensable for global growth and he expects them to announce IMF support at some stage.
Lagarde acknowledged in her news conference that giving emerging economies a greater say is a priority and said it was an issue she will raise in one-on-one meetings with IMF member countries.
We are going to ask the membership to finish the job in terms of quota resources and in terms of governance, she said.
There are changes that need to take place to better reflect the membership of the institution in terms of better economic strength, in terms of economic rule and we are not there.
Lagarde took aim at the United States for its delay in approving voting reforms the IMF members agreed to in 2010, and called on Washington to show leadership as the fund's largest shareholder.
The United States has declined to provide fresh funds for the IMF but on Wednesday it threw its weight behind the effort to raise more capital from other nations. Previously, it had pressed for bolder action from Europe first.
Lagarde also welcomed Europe's efforts in building its own firewall on Thursday. There is a little bit missing here or there but it shows significant determination to defend their currency zone.
A larger IMF war chest to safeguard countries could help ease concerns in financial markets over the risks of global contagion. Investors are growing increasingly worried that Italy and Spain will fail to ratchet down their budget deficits as their economies shrink, forcing them to join Greece, Ireland and Portugal as bailout recipients, a prospect that weighed on global stocks on Thursday.
Concerns also are mounting about the resiliency of the European banking system. The IMF estimates its banks must shrink assets by $2.6 trillion over the next two years to meet higher capital standards and cover bad loans, causing credit to contract in an already weak economy.
Spain's banks are particularly vulnerable, hit by a plunging property market and the falling value of Spanish government debt. An auction on Thursday highlighted nervousness over Madrid's finances. Although bidding was solid, the government paid an uncomfortable 5.74 percent on its new 10-year bond.
Lagarde said the EU should use its bailout funds to inject capital directly into euro-zone banks, which would lessen the risk piled onto government balance sheets, and she called for the EU to supervise national banks.
What we are advocating is that this be done without channeling through the sovereigns, she said.
Despite progress, the euro zone problems still pose a threat to world economic recovery, she said. We are seeing a light recovery blowing in the spring wind but we are also seeing some very dark clouds on the horizon.
World Bank President Robert Zoellick joined the call for deep and lasting economic reforms to secure the shaky global recovery.
Countries both developing and developed need to focus on structural reforms that will be the drivers of future growth, otherwise the world will keep stumbling along, he said.
(Writing by Stella Dawson; additional reporting by Lesley Wroughton, Leika Kihara; Editing by Neil Stempleman)