The head of the International Monetary Fund criticized Europe's disjointed response to the euro zone debt crisis on Tuesday after Germany and other states resisted his calls for bolder action.
IMF Managing Director Dominique Strauss-Kahn failed to persuade finance ministers of the 16-nation common currency area on Monday to increase the size of their financial safety net or the European Central Bank to step up government bond purchases.
The euro zone has to provide a comprehensive solution to this problem, Strauss-Kahn said after meeting Greek Prime Minister George Papandreou in Athens. The piecemeal approach, one country after another, is not a good one.
Tension persisted on European bond markets after euro zone ministers said they would take no new measures to tackle the risk of contagion spreading from Greece and Ireland, which have got EU/IMF bailouts, to Portugal and perhaps Spain and Italy.
Some central bankers and market participants say it would have been better to have put Portugal protectively under the EU/IMF financial umbrella last week at the same time as Ireland rather than dealing with one troubled country after another.
On Tuesday, Ireland's austerity budget passed its first parliamentary hurdle while the Italian Senate gave final approval to Rome's 2011 budget before confidence votes are held in the government of Prime Minister Silvio Berlusconi.
EU finance ministers did agree on Tuesday to conduct a new round of more rigorous bank stress tests in February after just seven out of 91 European banks failed a first examination last July of their ability to withstand financial shocks.
EU Monetary Affairs Commissioner Olli Rehn said the health check would assess the risk of a bank struggling to get credit or savers withdrawing deposits and not just how it would cope with a severe economic downturn or a possible sovereign default.
One of the lessons learned is that we have to have a liquidity assessment in these stress tests next time around, Rehn told a news conference.
SAFETY NET SUFFICIENT?
EU paymaster Germany took the lead in arguing the existing euro zone safety net was sufficient, and ministers said they had not even broached a proposal for issuing joint bonds, opposed by Berlin.
The premium investors demand to hold the bonds of Portugal and Spain rose in response to the ministers' inaction. Traders said the ECB, which engineered a fall in both countries' borrowing costs last week by stepping up its purchases of government debt, was staying on the sidelines.
Ministers left the ball with the ECB, said Carsten Brzeski, senior economist at ING in Brussels. Currently, the ECB is buying time for politicians. However, the ECB will not want to remain the only crisis manager and is eager to play the ball back to politicians.
An ECB source, speaking on condition of anonymity, said the central bank did not want to take on all the risk of supporting euro zone debtors by massive bond-buying, and wanted governments to take additional measures such as increasing the rescue fund.
The European Financial Stability Facility (EFSF) has the capacity to issue bonds worth up to 440 billion euros to help out troubled euro zone member states, as part of an overall EU/IMF rescue fund of 750 billion euros ($1 trillion).
European Council President Herman Van Rompuy, who will chair next week's crucial EU leaders' summit, told reporters: Up to now there is no need to increase the means available. If needed, we will consider, but there is no question today.
IRISH AID ENDORSED
All 27 European Union finance ministers formally endorsed an 85 billion euro EU/IMF assistance package for Ireland, clearing the way for the first loans to flow to Dublin once a tough austerity budget passes parliament.
Ireland's parliament passed the first in a series of votes on the budget on Tuesday evening, suggesting that enough of the budget is likely to pass to release bailout funds. Success had looked in doubt when independent politicians, on whom the government depends for support, said they might vote against it.
The budget aims to save 6 billion euros through tax rises and cuts in child and unemployment benefits and the minimum wage.
In Rome, the Senate gave final parliamentary approval to the 2011 budget, considered vital to buffering Italy from the euro zone's debt crisis.
President Giorgio Napolitano had insisted the budget be approved before parliament holds confidence votes on the tottering government next week, in order to minimise the risk of market tensions if Berlusconi should fall.
Strauss-Kahn praised debt-stricken Greece for its austerity measures and reform efforts but urged more sacrifices, and said stronger economic growth was the key to beating the crisis.
Nobody would be talking about debt crisis if there was high (economic) growth in Europe. The question is growth, growth, growth, not only growth for the sake of growth but growth for jobs, he said, arguing that the EU could achieve 3-4 percent annual growth if it took the right decisions.
At Monday's Eurogroup meeting, the IMF chief also suggested the ECB step up purchases of government bonds, effectively becoming a buyer of last resort for euro zone sovereign debt.
But ECB executive board member Juergen Stark, a renowned hawk, dismissed calls for the bank to accelerate its bond buying program. He also rejected the idea of a common European sovereign bond, which would bring down the borrowing costs of weaker nations, but could raise those of Germany.
There had been some expectation among investors that the euro zone might decide to take more radical steps, particularly after the IMF's intervention and a prominent call by two veteran ministers for joint E-bonds.
Italian Economy Minister Giulio Tremonti, who co-authored the euro zone bond proposal, insisted on Tuesday it would not require any change in EU treaties. However, German Chancellor Angela Merkel dismissed the idea on Monday and said it would require a major change in EU treaty rules.
(Additional reporting by Harry Papachristou in Athens; Francesca Landini in Brussels, Padraig Halpin and Noah Barkin in Dublin, and William James in London; Writing by Mike Peacock, Paul Taylor and David Stamp)