IMF: solution is still eluding the Eurozone

THE WORLD is still waiting for a solution to the Eurozone crisis following last week’s make-or-break summit, IMF chief economic Olivier Blanchard said yesterday.

While he said there has been “progress”, Blanchard added: “What happened last week is important: it’s part of the solution, but it’s not the solution.”

“A lot of the volatility is coming from statements from Europe, showing the range of opinions and inability to get to a logical decision process,” he added.

Markets had been hoping that Eurozone nations would strike a deal strong enough to persuade the European Central Bank (ECB), led by Mario Draghi, to start printing money to buy up government debt.

But in the event, despite unveiling a “new fiscal compact”, which demands that “the annual structural deficit does not exceed 0.5 per cent of nominal GDP”, it is not clear how or if the changed treaty will ratified and whether it will be more successfully enforced than its predecessor, the Stability and Growth Pact, which was largely ignored.

The summit agreement also contained a promise to boost the region’s loans to the IMF by €200bn (£170.8bn), to accelerate the establishment of the European Stability Mechanism (ESM), the region’s permanent bailout fund, and to consider increasing its lending capacity over €500bn in March next year.

That could prove too long for markets to wait, however, with economists suggesting that firepower on the order of €1-2 trillion will be required.

TF Market Advisors’ Peter Tchir said that the strategy amounted to “forming a circle, holding hands, and chanting IMF and G-20 over and over [so that] the market was placated, at least for a day”.

However, some economists suggested that Draghi has effectively already begun quantitative easing to monetise Eurozone nations’ debt “by the back door”.

Draghi announced last week that he is prepared to deploy ECB resources to buy bank bonds, but not to bail out nations.

Henderson’s Simon Ward said: “What Draghi is trying to do is – because the Bundesbank won’t let him step up direct [government] bond purchases ­– he’s aiming to shovel so much liquidity into the banking system that the banks buy the bonds for him.”

If Eurozone leaders cannot produce an agreement that brings government bond yields down decisively, the first quarter of next year could prove difficult for sovereigns. Italy will see €46bn of its debt mature in February and another €34bn in March.