IMF chief Christine Lagarde met euro area officials in Luxembourg
as Greece was seeking to revise its bailout terms, and Spain was
preparing to request aid to shore up its banks while it struggled,
along with Italy, with soaring borrowing costs.
"We are clearly seeing additional tensions applying to both banks
and sovereigns," Lagarde said, calling for "determined and forceful
moves" that should "restore faith in the (European monetary) system,"
whose feasibility was being "questioned."
The IMF urged "a more creative and inventive monetary policy" that
might involve a reactivation of the ECB's bond-buying programme,
which last year helped contain a surge in Italian and Spanish bond
yields.
ECB President Mario Draghi was present in Luxembourg, but did not
appear before reporters to respond to Lagarde's comments.
In a news conference, Lagarde slammed plans to rescue the Spanish
banking sector via loans to the Madrid government, a move that has
spooked markets because it will increase the country's debt.
"Clearly the preference of the IMF ... is to try to break this
negative loop between banks and sovereigns," she said, calling for
aid to be given directly to banks. "We certainly hope that wisdom can
prevail."
Two independent audits commissioned by the Spanish government
showed Thursday that the country's lenders have recapitalization
needs of up to 62 billion euros (79 billion dollars).
Two weeks ago, eurozone partners said they could provide as much
as 100 billion euros. But in Luxembourg, Spain's Economy Minister
Luis de Guindos said he was not yet ready to make an official
application.
"This is not a simple process. It starts now and has to be
completed in the next days," he said. A complete "road map" would be
available in late July, when more detailed bank stress tests will be
published, he added.
Luxembourg Prime Minister Jean-Claude Juncker, who chairs eurozone
finance ministers' discussions, said the Spanish aid request would
come "by next Monday." French Finance Minister Pierre Moscovici said
it would be presented Friday.
The eurozone loan for Spain should be approved at the next meeting
of the Eurogroup panel of eurozone finance ministers on July 9, EU
Economy Commissioner Olli Rehn said.
Money would be provided by the current euro rescue fund, the
European Financial Stability Facility (EFSF), until its replacement,
the European Stability Mechanism (ESM), comes on line, Juncker and
Rehn indicated.
Investors have been fretting about the use of the ESM or the EFSF,
as the former enjoys preferred creditor status, while the latter does
not.
Eurozone loans to Spain through the ESM would enjoy greater
protection in case Madrid defaulted, leaving private creditors
shortchanged. "Ministers will look into this again," EFSF manager
Klaus Regling said.
Lagarde also recommended softening deficit targets for countries
in recession, and longer term risk-sharing measures such as a banking
union and the "gradual, but limited sharing" of sovereign debt,
matched by "stronger governance" and "democratic controls."
The advice went against most of Germany's preferred policy
prescriptions.
Throughout the crisis, Berlin has been wary of using common
resources to make life easier for struggling eurozone members,
fearing that outside help would lead them to relax necessary but
painful budget cuts and economic reforms.
Earlier, German Finance Minister Wolfgang Schaeuble rejected
"speculation" that conditions allowing eurozone rescue funds'
interventions in the bond markets may be eased in response to Italy
and Spain's plight.
IMF-eurozone positions appeared closer on Greece, as both sides
downplayed suggestions that they were ready to relax the terms of the
country's bailout in order to provide breathing space to the new
government in Athens.
Juncker said "prior actions" need to be spelled in an "updated
memorandum of understanding" before more bailout payments can be
unblocked. But Rehn said the country would not be starved of cash:
"there should be no problem in this regard in the short term."
An EU-ECB-IMF troika would be in Athens on Monday to ascertain how
far Greece has fallen behind in reform efforts, Lagarde said. In the
meantime, a pending 1-billion-euro bailout payment will be unfrozen
by the end of June, helping Athens pay its share into the ESM.
Because of its exposure to Greece, Cyprus was expected to follow
in Spain's footsteps in asking for loans to fix its financial sector.
However, it was unclear whether it would turn to eurozone partners or
Russia, which has provided help in the past.
