The world's major central banks acted jointly on Wednesday to provide cheaper dollar funding to European banks facing a credit crunch as the euro zone's debt crisis drove EU ministers to urge more IMF help to avert financial disaster.
The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilise global markets in the 2008 financial crisis after the collapse of Lehman Brothers.
In Italy, now the focal point of the euro debt crisis, the Treasury started emergency cash tenders for banks which have been squeezed particularly hard as Rome's borrowing costs have soared towards 8 percent, a level seen as unaffordable in the long term.
The euro and European shares surged on the central bank action, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help.
In a policy shift by Europe's main paymaster, Finance Minister Wolfgang Schaeuble said Germany was open to increasing the IMF's resources through bilateral loans or more special drawing rights, reversing the stance Berlin took earlier this month at the Cannes G20 summit.
The new openness to a bigger IMF role came as Germany presses its EU partners to agree next week on treaty changes to create coercive powers to make euro zone countries change their budgets if they breach EU deficit and debt rules.
The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration, Economic and Monetary Affairs Commissioner Olli Rehn told the European Parliament.
Two years into Europe's debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.
Euro zone leaders have agreed belatedly on one half-measure after another but have failed to restore confidence and some analysts now see a December 9 Brussels summit as a make-or-break moment for the euro.
Finance ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.
We are now looking at a true financial crisis -- that is a broad-based disruption in financial markets, Christian Noyer, France's central bank governor and a governing council member of the European Central Bank, told a conference in Singapore.
Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels on Wednesday, as markets assessed the rescue fund boost as inadequate, but fell back on news of the central banks' joint action.
It must also be remembered that the EFSF is already funding at very wide levels (high borrowing costs) over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France, Rabobank strategists said in a note.
This must call into question any plans related to the EFSF. It is yesterday's solution and the market has simply moved on.
IMF TO MATCH?
The 17-nation Eurogroup adopted detailed plans to insure the first 20-30 percent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy euro zone government bonds.
Both schemes would be operational by January with about 250 billion euros (214 billion pounds) from the euro zone's EFSF bailout fund available to leverage after funding a second rescue programme for Greece, Eurogroup chairman Jean-Claude Juncker said.
The aim was for the IMF to match and support the new firepower of the EFSF, Juncker told a news conference.
But with China and other major sovereign funds cautious about investing more in euro zone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.
It is really not possible to give one number for leveraging because it is a process. We will not give out 100 billion next month, we will need money as we go along, Regling said.
Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis.
The prospects of drawing the IMF more deeply into supporting the euro zone are uncertain. Several big economies are sceptical of European calls for more resources for the global lender.
The United States, Japan and other Asian states are hesitant to chip in unless Europe commits to first use its own resources to fix the problem and peripheral euro zone states map out more concrete steps on fiscal and economic reforms.
Nobody wants to spend money on something they doubt would work, a G20 official said.
That goes not only for Europe but for any other country outside Europe. The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won't do.
MONTI DENIES IMF BID
New Italian Prime Minister Mario Monti said he had received a very positive reaction from the euro zone ministers to his fiscal plans, although he was told to take extra deficit cutting measures beyond an austerity plan already adopted to meet its balanced budget promise in 2013.
He also said he had met the head of the IMF's European department on Wednesday but Italy had not considered taking help from the Fund.
Reuters reported on Tuesday that Italian and IMF officials have held preliminary discussions on some form of financial support for Rome, although no decision has been taken, according to sources familiar with the talks.
Italian bond yields are now above the levels at which Greece, Ireland and Portugal were forced to apply for EU/IMF bailouts, and Rome has a wall of issuance due from late January to roll over maturing debt.
The Eurogroup ministers agreed to release their portion of an 8 billion euro aid payment to Greece, the sixth instalment of 110 billion euros of EU/IMF loans agreed last year and necessary to help Athens stave off the immediate threat of default.
Juncker said the money would be released by mid-December, once the IMF signs off on its portion early next month.
G20 leaders promised this month to boost the global lender's warchest. However, another G20 source said policymakers had made no progress since then in efforts to boost IMF resources, which at current levels may not be sufficient to overcome the crisis.
EU sources said one option being explored is for euro system central banks to lend to the IMF so it can in turn lend to Italy and Spain while applying IMF borrowing conditions.
With Germany opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets and fast.
The ECB shows no sign yet of responding to widespread calls to massively increase its bond-buying although EU officials said it may have to shift, even if the EFSF gained IMF help.
A Reuters poll of economists showed a 40 percent chance of the ECB stepping up purchases with freshly printed money within six months, something it has opposed so far.
The poll forecast a 60 percent chance of an ECB rate cut to 1.0 percent next week and a big majority of economists said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat at its next meeting on Dec 8.
(Additional reporting by Marius Zaharia in London, Erik Kirschbaum in Berlin, Robin Emmott and John O'Donnell in Brussels, Saeed Azhar and Kevin Lim in Singapore; Writing by Paul Taylor/Mike Peacock; Editing by Janet McBride/Ruth Pitchford)