IMF baffled by calls to enter bond market as fears of a slump grow

THE INTERNATIONAL Monetary Fund has urged Europe to shore up its banks with up an injection of up to €200bn (£172.6bn) amid fears a freeze in lending will trigger another recession.

Yesterday Antonio Borges (pictured), the IMF’s Europe director, said the move would help to restore confidence across the continent.

“We are talking about figures of between €100bn and €200bn, which in our view is very, very small compared to the size of the European capital markets and compared to the resources of the new, enhanced European Financial Stability Fund.”

The €440bn EFSF, which was set up in May last year and used to bail out Ireland and Portugal, will be allowed to lend governments money to recapitalise banks, after its new powers have been ratified by the governments of Eurozone members.

Borges threw the IMF into confusion later in the day, however, when he suggested it could intervene to buy sovereign bonds from Italy and Spain to ease the debt crisis – only to retract the suggestion several hours later.

He said the IMF could invest alongside the EFSF and was “ready to play that role”, which would reassure to investors in troubled sovereign states.

“Any investment we would make in Spain or Italy would be based on full confidence that these countries are on the right track -- that they are solvent and they are taking all the measures they should.”

Hours later, however, Borges issued a terse statement saying he wanted to “be clear about some earlier comments” and talked down the prospects of the IMF taking a greater role in the crisis.

“The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly,” he said, adding that the IMF had no additional requests currently for financial support.

It came as concerns rose over the exposure of French bans to the stricken Greek economy and the IMF warned of the prospects of another recession in Europe.

The Washington-based lender said growth across Europe would fall to 2.3 per cent this year and 1.8 per cent in 2012.

Meanwhile the government of Spain predicted its economy would grow in the third and fourth quarters of this year, despite the country having the highest unemployment rate in Europe.