By Jack Duffy

COPENHAGEN (MNI)- Europe has done enough to strengthen its
financial firewall and now wants its global partners to agree to an
increase in resources for the International Monetary Fund, European
finance officials said here.

Despite complaints from some analysts that Europe’s deal contained
substantial “window dressing” to make the numbers seem larger than they
were, central bankers and finance ministers said they had responded to
international demands to put more European money at risk.

“The firewall looks to us as being absolutely credible,” Vitor
Constancio, European Central Bank vice president said Saturday.

And ECB Executive Board Member Joerg Asmussen said Friday that “now
we Europeans can travel to the meeting of the IMF in Washington having
done our homework on European firewalls.”

European leaders hope their action here will convince Group of 20
countries to back IMF Managing Director Christine Lagarde’s call for a
$500 billion increase in the Fund’s resources at meetings to be held
later this month in Washington. The United States and other countries
had so far objected, arguing that the IMF’s current resources are
adequate and that Europe had not done enough to increase its own
firewall resources.

French Finance Minister Francois Baroin said Saturday, however,
that “Europe has done its part” and is now “counting on an increase in
resources for the IMF.” He said a “double firewall” — with the IMF
helping to control global systemic risks while Europe worked to solve
its own debt crisis — was the best way to help ensure financial
stability.

Yet the deal agreed to by Eurozone finance ministers on Friday was
well below the E1 trillion that Baroin himself had said was needed in an
interview with BFM Business radio only one day before.

The new European firewall carries a headline figure of E800
billion, but after extracting funds that already have been paid out, the
amount of new lending capacity available to confront new crises will be
capped at E500 billion, as Germany had demanded.

Some moves to strengthen the firewall were taken, however.
Ministers agreed, for example, that the E240 billion of unused funds in
the temporary rescue vehicle — the European Financial Stability
Facility — could be used until mid-2013 to ensure that the permanent
fund — the European Stability Mechanism — had a full lending capacity
while it was still in its start-up phase.

They also agreed to get the ESM up to full capacity by mid-2014,
two years earlier than planned. The rescue fund will have paid-in
capital of E80 billion, and member states will pay in two tranches of
that capital this year, another two in 2013 and a final tranche in 2014.

There is also another way in which the new deal allows the ESM to
reach its full capacity of E500 billion more quickly than the original
plan would have.

In the old plan, the ESM’s E500 billion would have included about
E200 billion of EFSF funds already committed to Ireland, Greece and
Portugal, which would have meant new capacity of only E300 billion until
the EFSF loans were paid back. Currently committed EFSF loans will not
be completely repaid for about 20 years.

By administering the EFSF’s E200 billion in loans separately, the
officials have allowed the ESM to reach its full capacity as soon as all
the capital is paid in, — even sooner, given the availability of the
EFSF’s unused funds — and that is about two decades earlier than
waiting for all the EFSF loans to be paid off.

Jacob Kirkegaard, a senior research fellow at the Peterson
Institute for International Economics in Washington said a stronger
European firewall was a “political prerequisite” for an increase in IMF
funds. Europe needs to avoid the “reverse Robin Hood element of much
poorer G-20 nations providing the bailout,” he said in an e-mail.

Whether the new firewall plan is enough to convince emerging market
nations to contribute more resources may well depend on whether Europe
is willing to cede more political power at the IMF to emerging
economies, Kirkegaard said.

It will also depend on how markets react. Peripheral Eurozone bond
markets suffered one of their worst days of the year last Thursday amid
renewed worries about Spain and Italy. Italian 10-year yields rose to
5.24%, before dropping back to 5.11% on Friday. Spanish 10-year yields
climbed to 5.47%, before easing back to 5.35%.

“There must be a decision in the G20 and IMF annual meeting on the
upscaling of resources,” Swedish Finance Minister Anders Borg said
Saturday. “We are now seeing a stabilization of the crisis but obviously
that would be strengthened further if we have a broad, wider and
stronger firewall.”

–Paris newsroom, +33142715540; jduffy@marketnews.com

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