Global politics and economic theory don’t lend themselves easily to punchlines. But in January this year, Christine Lagarde managed to inject a little light relief into proceedings at the World Economic Forum.
Holding up her Louis Vuitton handbag, the new managing director of the International Monetary Fund (IMF) turned to her fellow power brokers in one session and said: “I am here, with my little bag, to collect a bit of money.”
The joke broke the ice and the room rippled with laughter. But, beneath the disarming charm, Lagarde was deadly serious.
For months now, the IMF has been trying to coerce its 187 members into committing as much as $600bn (£378bn) more to the fund to build what she described at the Brookings Institute in Washington last week as a “global firewall” to defeat once and for all the European sovereign debt crisis.
Ever since “the Greek problem” flared up again in July last year, the talk from Brussels to London to Beijing has been about “big bazookas” and “giant firewalls” – a vast bail-out fund available to rescue any struggling nation from bankruptcy.
If the bazooka worked, the thinking goes, it would restore market confidence without actually paying out a penny. As Vítor Constâncio, the European Central Bank’s (ECB) vice-president, put it: “My definition of a firewall is that it isn’t necessarily used. It is a safety net.
”The pressure has been on the 17-member eurozone to build its own bazooka, but Lagarde has quietly been canvassing for an increase in the IMF’s own resources.
Behind her thinking has been the fact that the eurozone simply does not have the resources to bail out Italy, its third-largest economy, without help. Furthermore, a crisis in Italy, or indeed Spain, would threaten the global economy all over again. A “safety net” would allay such fears.
It has been a baptism of fire for Lagarde, France’s former finance minister who was appointed after the disgraced Dominique Strauss-Kahn stepped down in the wake of rape allegations. Just nine months into the job, she has the unenviable task of trying to build a co-ordinated global strategy on the shifting tectonic plates of domestic politics.
At the IMF’s key spring meetings in Washington this week, she faces her first real test. If Lagarde can strike a big deal on resources, she will be garlanded with praise. If she can’t, the jury will remain out. Either way, the pressure is now on.
Until recently, talk of IMF funding has been hampered by the eurozone members’ failure to show the “colour of their money”, as George Osborne demanded in Davos. Last month, though, a eurozone bazooka was agreed in principle – to increase the size of the rescue fund by about €300bn (£247bn) to €800bn.
Coming on the back of the ECB’s €1 trillion emergency funding line for the banks, Europe could finally argue that it had played its card.
Limping to the podium at Brookings last week, after surgery on her knee, Lagarde said the time had come “to increase our resources” at the IMF, following the eurozone’s efforts.
“I am hopeful that, during the spring meetings, we will make progress on this issue,” she added, a statement that some believe has left her something of a hostage to fortune.
Osborne, who is close to Lagarde, having been one of the first to push for her IMF nomination, is thought to be prepared to commit the UK to another funding round of about £10bn. China and Japan have also hinted at their support, but there are big obstacles – not least the US.
Timothy Geithner, the US Treasury Secretary, is not convinced that the Euro Group has added enough boom to its own bazooka, and independent analysis suggests he has a point.
As the Centre for European Policy Studies (CEPS) has noted, the eurozone’s new bazooka leaves a “safety buffer” of just €300bn after taking into consideration the existing programmes for Greece, Ireland and Portugal.
That hardly looks like the “mother of all firewalls” called for by the respected Paris-based think tank the Organisation for Economic Co-operation and Development.
CEPS added: “It seems clear that [the firewall] would not be able to provide substantial support for Spain and Italy.”
Tellingly, all the US Treasury could muster in response to the eurozone agreement was the weak recognition that it “reinforces a trajectory of positive efforts to strengthen confidence in the euro area”. UK sources said that, privately, the US was bitterly disappointed, and adamant that no further US taxpayer money would be put at risk of more euro bail-outs.
Normally, US opposition would be enough to kill any plan to increase resources. But Lagarde has other ideas. She hopes to corral the rest of the major non-eurozone players – the UK, Canada, Japan, Australia, China and India – into a joint agreement. But she has already begun managing down expectations.
Having previously indicated that she wanted as much as $600bn more, she said at Brookings: “The needs now may not be quite as large as we had estimated earlier this year.”
UK sources said she would be lucky to secure $400bn. Of that, the eurozone members have committed to contributing €150bn – on top of their own bazooka – leaving just $250bn to be gathered from other members.
Even at $400bn, the extra resources would be a retreat from earlier ambitions. Lagarde wanted to increase the IMF’s available resources from the current $400bn to $1 trillion, while global policymakers had hoped for a total bazooka of €2 trillion to allay concerns about Europe. The IMF and the eurozone’s combined funds will fall well short of that.
Making this week’s talks even more awkward has been the fresh fear of a crisis in Spain, sparked initially by the new prime minister’s decision to cut the deficit more slowly than originally agreed.
As markets have lost faith in Spain, questions have resurfaced about whether the eurozone firewall is big enough. According to CEPS, “even if the [firewall] only had to cover half of the financial needs of Spain and Italy”, it would need another €400bn.
The renewed crisis is making Lagarde’s argument harder to sell. Canada, in particular, has sympathy with Geithner’s stance that the eurozone should be doing much more before extending the begging bowl to the rest of the world.
If any one of the major non-eurozone countries refuses to play ball, a deal will be temporarily abandoned – to be taken up again at the G20 summit in Mexico in June.
Even securing €250bn from non-eurozone members excluding the US could prove difficult.
The UK, which speaks for 4.5pc of the IMF, has the authority to commit another £10bn without recourse to Parliament under the “new arrangements to borrow” established at the 2009 G20 summit in London.
Politically, it would be a tough call, though. Britain has already pledged £29.5bn to the IMF, £5.5bn of which has been ploughed into rescuing Greece, Portugal, Ireland and other bailed-out nations.
Topping that up would leave the Government open to accusations that it was chucking good money after bad. With the US refusing to join in, the argument would be even more difficult to make to an already sceptical electorate.
Given the difficulties faced by one of Lagarde’s main backers, filling her handbag will be as tricky as ever.
telegraph.co.uk
Holding up her Louis Vuitton handbag, the new managing director of the International Monetary Fund (IMF) turned to her fellow power brokers in one session and said: “I am here, with my little bag, to collect a bit of money.”
The joke broke the ice and the room rippled with laughter. But, beneath the disarming charm, Lagarde was deadly serious.
For months now, the IMF has been trying to coerce its 187 members into committing as much as $600bn (£378bn) more to the fund to build what she described at the Brookings Institute in Washington last week as a “global firewall” to defeat once and for all the European sovereign debt crisis.
Ever since “the Greek problem” flared up again in July last year, the talk from Brussels to London to Beijing has been about “big bazookas” and “giant firewalls” – a vast bail-out fund available to rescue any struggling nation from bankruptcy.
If the bazooka worked, the thinking goes, it would restore market confidence without actually paying out a penny. As Vítor Constâncio, the European Central Bank’s (ECB) vice-president, put it: “My definition of a firewall is that it isn’t necessarily used. It is a safety net.
”The pressure has been on the 17-member eurozone to build its own bazooka, but Lagarde has quietly been canvassing for an increase in the IMF’s own resources.
Behind her thinking has been the fact that the eurozone simply does not have the resources to bail out Italy, its third-largest economy, without help. Furthermore, a crisis in Italy, or indeed Spain, would threaten the global economy all over again. A “safety net” would allay such fears.
It has been a baptism of fire for Lagarde, France’s former finance minister who was appointed after the disgraced Dominique Strauss-Kahn stepped down in the wake of rape allegations. Just nine months into the job, she has the unenviable task of trying to build a co-ordinated global strategy on the shifting tectonic plates of domestic politics.
At the IMF’s key spring meetings in Washington this week, she faces her first real test. If Lagarde can strike a big deal on resources, she will be garlanded with praise. If she can’t, the jury will remain out. Either way, the pressure is now on.
Until recently, talk of IMF funding has been hampered by the eurozone members’ failure to show the “colour of their money”, as George Osborne demanded in Davos. Last month, though, a eurozone bazooka was agreed in principle – to increase the size of the rescue fund by about €300bn (£247bn) to €800bn.
Coming on the back of the ECB’s €1 trillion emergency funding line for the banks, Europe could finally argue that it had played its card.
Limping to the podium at Brookings last week, after surgery on her knee, Lagarde said the time had come “to increase our resources” at the IMF, following the eurozone’s efforts.
“I am hopeful that, during the spring meetings, we will make progress on this issue,” she added, a statement that some believe has left her something of a hostage to fortune.
Osborne, who is close to Lagarde, having been one of the first to push for her IMF nomination, is thought to be prepared to commit the UK to another funding round of about £10bn. China and Japan have also hinted at their support, but there are big obstacles – not least the US.
Timothy Geithner, the US Treasury Secretary, is not convinced that the Euro Group has added enough boom to its own bazooka, and independent analysis suggests he has a point.
As the Centre for European Policy Studies (CEPS) has noted, the eurozone’s new bazooka leaves a “safety buffer” of just €300bn after taking into consideration the existing programmes for Greece, Ireland and Portugal.
That hardly looks like the “mother of all firewalls” called for by the respected Paris-based think tank the Organisation for Economic Co-operation and Development.
CEPS added: “It seems clear that [the firewall] would not be able to provide substantial support for Spain and Italy.”
Tellingly, all the US Treasury could muster in response to the eurozone agreement was the weak recognition that it “reinforces a trajectory of positive efforts to strengthen confidence in the euro area”. UK sources said that, privately, the US was bitterly disappointed, and adamant that no further US taxpayer money would be put at risk of more euro bail-outs.
Normally, US opposition would be enough to kill any plan to increase resources. But Lagarde has other ideas. She hopes to corral the rest of the major non-eurozone players – the UK, Canada, Japan, Australia, China and India – into a joint agreement. But she has already begun managing down expectations.
Having previously indicated that she wanted as much as $600bn more, she said at Brookings: “The needs now may not be quite as large as we had estimated earlier this year.”
UK sources said she would be lucky to secure $400bn. Of that, the eurozone members have committed to contributing €150bn – on top of their own bazooka – leaving just $250bn to be gathered from other members.
Even at $400bn, the extra resources would be a retreat from earlier ambitions. Lagarde wanted to increase the IMF’s available resources from the current $400bn to $1 trillion, while global policymakers had hoped for a total bazooka of €2 trillion to allay concerns about Europe. The IMF and the eurozone’s combined funds will fall well short of that.
Making this week’s talks even more awkward has been the fresh fear of a crisis in Spain, sparked initially by the new prime minister’s decision to cut the deficit more slowly than originally agreed.
As markets have lost faith in Spain, questions have resurfaced about whether the eurozone firewall is big enough. According to CEPS, “even if the [firewall] only had to cover half of the financial needs of Spain and Italy”, it would need another €400bn.
The renewed crisis is making Lagarde’s argument harder to sell. Canada, in particular, has sympathy with Geithner’s stance that the eurozone should be doing much more before extending the begging bowl to the rest of the world.
If any one of the major non-eurozone countries refuses to play ball, a deal will be temporarily abandoned – to be taken up again at the G20 summit in Mexico in June.
Even securing €250bn from non-eurozone members excluding the US could prove difficult.
The UK, which speaks for 4.5pc of the IMF, has the authority to commit another £10bn without recourse to Parliament under the “new arrangements to borrow” established at the 2009 G20 summit in London.
Politically, it would be a tough call, though. Britain has already pledged £29.5bn to the IMF, £5.5bn of which has been ploughed into rescuing Greece, Portugal, Ireland and other bailed-out nations.
Topping that up would leave the Government open to accusations that it was chucking good money after bad. With the US refusing to join in, the argument would be even more difficult to make to an already sceptical electorate.
Given the difficulties faced by one of Lagarde’s main backers, filling her handbag will be as tricky as ever.
telegraph.co.uk
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