The International Monetary Fund (IMF) is urging the European Union (EU) to expand the size of its rescue fund in the wake of weakening market performance in the euro zone’s peripheral members.
The IMF also recommends that the EU purchase more government debt in order to keep the euro currency stable.
At present, the EU has a reserve of about 750-billion with which to provide emergency loans to troubled nations, which includes 440-billion in the European Financial Stability Facility (EFSF), and a pledge of 250-billion from the IMF.
There are worries that if Spain and Portugal needs funding, there is not enough in the till.
The recovery could still stay the course, but this scenario could now easily be derailed by the renewed financial market turmoil, the IME cautioned in a report obtained by Reuters. “The sovereign and financial market storm affecting the periphery constitutes a severe downside risk. There is also a strong case for increasing the resources available for this safety net and making their use more flexible, including for the purpose of providing more effective support to banking systems.
In response to the proposal, Belgium’s Didier Reynders said that while the EU needs to increase its reserve of funds, the IMF should also contribute more.
If one doubles the fund, then the IMF must do the same, Reynders said.
While German Chancellor Angela Merkel has already expressed disapproval of increasing the rescue fund, the president of the European Central Bank (ECB) Jean-Claude Trichet recently said it should be considered.