IMF urges bond buys and direct banking support

City A.M. Reporter
THE International Monetary Fund urged the Eurozone yesterday to channel aid directly to struggling banks rather than via governments and called for the European Central Bank to cut interest rates, saying the future of the euro was at stake.

The stark message from IMF managing director Christine Lagarde, delivered to Eurozone finance ministers who met in Luxembourg, will increase pressure to forge a unified approach to tackling problems at struggling banks such as those in Spain.

“We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area,” Lagarde said. “A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith," she said. “At the moment, the viability of the European monetary system is questioned.”

Lagarde spelled out a plan that envisioned the issuance of jointly guaranteed Eurozone debt as well as more centralised economic control in the 17 countries that use the euro.

As ministers prepared to provide up to €100bn in aid for Spain to shore up its stricken banks, Lagarde said financial support for banks should be given directly, rather than via the state.

Analysts believe such a model could entail allowing the Eurozone’s permanent rescue scheme, the European Stability Mechanism (ESM) to directly inject capital into banks in return for a shareholding, or to lend at penalty rate of interest.