Euro zone and International Monetary Fund officials have discussed the idea of the European Central Bank lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns, officials said.
Some discussions on this have taken place... It could be one way of getting around the legal restrictions on the ECB, one official with knowledge of the talks said. A second official said ECB lending to the IMF was being explored.
The idea appears as the rising severity of the euro zone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms.
Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the euro zone bailout fund EFSF to 1 trillion euros were unlikely to fully materialise or, even if they do, to be sufficient.
But EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to euro zone governments, which should first of all change policies that created large public debt and slow growth.
France has openly called for the ECB to get more involved by issuing the euro zone bailout fund -- the European Financial Stability Facility (EFSF) -- a banking licence that would allow it to refinance itself with the ECB liquidity operations.
Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB's independence and in the end lead to higher inflation, which would make all euro zone citizens poorer.
ECB INDEPENDENT, BUT HELPING
Policymakers have discussed, therefore, how to get the ECB involved in crisis-fighting without endangering its independence. Lending money to the IMF, rather than any euro zone government, could achieve that, officials said.
It is just an idea, at least for now, a euro zone official said.
Article 23 of the ECB statute says that the ECB may conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations.
The IMF could then use the ECB money to finance various rescue operations in the euro zone like bailouts, precautionary credit lines, on its own, or in cooperation with the EFSF.
It is doable, a second euro zone official said. Two further euro zone officials said they had heard of the idea.
Money from the ECB to the IMF would also help alleviate criticism from non-euro zone IMF member countries that all of the fund's resources -- which come from all IMF members -- are being used up for the relatively rich euro zone.
To prevent a collapse of the euro zone debt market, the ECB has been buying government bonds on the secondary market, saying it was doing so to improve the transmission of its monetary policy, which highly volatile bond markets were distorting.
It has stressed however, that such purchases were limited in scope and were also temporary -- a half-hearted approach in the eyes of the market.
While it may be designed to keep the pressure on governments to implement reforms, euro zone policymakers privately say it is also the costliest possible way of dealing with the crisis.
If the ECB told the market it would buy euro zone bonds for as long as it takes, or up to some big limit, who in the market would want to test that? But if they do it bit by bit, markets keep coming back, a third euro zone official said.