Time to bailout the bailouter? IMF funds deemed inadequate to prevent financial collapse in Europe

September 26, 2011 – BRUSSELS – The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states. In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-case scenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.” The suggestion came after European officials revealed they were working on a radical plan to boost their own bail-out fund, the European Financial Stability Facility (EFSF), from €440bn (£384bn) to around €3 trillion. The plan to increase the EFSF firepower is the crucial part of a three-pronged strategy being designed by German and French authorities to stop the eurozone’s debt crisis spiraling out of control. It also includes a large-scale recapitalization of European banks and a plan for an “orderly” Greek default. Although Britain is not involved in the large-scale eurozone bail-out projects, it is liable for 4.5pc of IMF funding. The plan, which would aim to build a “firebreak” around the indebted eurozone countries, emerged at the IMF annual meeting in Washington where global leaders united to demand urgent action from European politicians. Despite the developments, traders warned that the failure of politicians to agree a solid rescue plan would result in more turbulence on global stock markets. One trader said: “The expansion to the EFSF would be good, although it’s still not the eurobonds that the market has really wanted to see. And, most significantly, it’s still only an idea, not a deal.” In a G20 communiqué issued on Friday, leaders set a six-week deadline to resolve the crisis – to unveil a solution by the G20 summit in Cannes on November 4. However, already the plans to recapitalize European banks have been criticized in France – which has the biggest exposure to Greek debt. –Telegraph