Angela Merkel and Christine Lagarde will be forced to negotiate - Getty Images via @daylife
Markets have taken another hit of hopium after Eurozone officials, along with the IMF, agreed on the terms of a new €130 billion Greek bailout. Despite the fact that implementation risks abound, it’s the coming G-20 meetings in Mexico that have taken center stage. Global finance ministers will discuss increasing the IMF’s lending capacity while pressure mounts on Germany to agree on increasing funds to build a credible firewall in Europe.
European politics have now gone global. Finance ministers from across the globe will be flying into Mexico City over the weekend in the context of the next G-20 meeting where the Eurozone’s sovereign debt crisis will once again be the center of attention. The main points in contention: the building of a credible, and domestically funded, European firewall to reduce the risk of contagion, and the raising of the International Monetary Funds’ lending capacity.
With Europe officially in a “mild recession,” as the EU’s vice-president for economic and monetary affairs Olli Rehn made clear on Thursday, doubts over the sustainability of recent market stability point toward the need for a larger firewall that counts with enough firepower to ring fence any potential contagion. Pressure has been mounting on European policymakers to combine the current emergency fund, the EFSF (which still holds €250 billion in unused funds) with the coming European Stability Mechanism (ESM) to create a €750 billion firewall.
Despite political uncertainty, U.S. equity markets finished in positive territory with the Nasdaq leading the way, up 0.8% to 2,958 New York. Among the day’s most active stocks were Bank of America and Sprint, in positive territory, and HP, down on weak earnings. Gold and oil were up while the euro-dollar exchange rate firmed to 1.3369.
Leaders, both in Europe and abroad, have called on policymakers to combine the emergency funds. Throughout the G-20, many have considered it a pre-condition for any discussion on expanding the IMF’s lending capacity, a move seen as key to secure additional firepower to support nations facing funding problems stemming from a worsening of the European sovereign debt crisis. IMF chief Christine Lagarde has been pushing to increase the IMF’s lending capacity by $400 to $500 billion, but has encountered international resistance.
While Treasury Secretary Tim Geithner will be present at the G-20 summit, the most vocal U.S. official has been Lael Brainard, Treasury undersecretary for international affairs. Brainard made it clear that the U.S. would not pledge additional funds until a European firewall has been set up. Mexican President Felipe Calderon, who is chairing the meetings, also called for a strategy to limit contagion. Calderon went farther, saying that both debtor and creditor nations should shoulder the costs of their mistakes, clearly asking for Germany to step up to the plate.
German Chancellor Angela Merkel continues to resist, though, in increasing isolation. Merkel has the difficult task of recruiting enough political support from her center-right coalition to secure a legislative victory in the Bundestag to approve a second bailout for Greece. Merkel is walking the political tightrope: forced to play hardball on the issue of pledging more German funds for bailouts while negotiating to get the IMF to free up more funds, necessary to support those bailouts.
European Finance Ministers are set to meet in Brussels over the first two days of March to discuss how to move forward with Greece. A few days before that, from February 24 to the 26, finance ministers will be flying to Mexico to figure out how big the IMF’s lending capacity will end up being. Germany will once again be sitting at the center of the negotiating table.
