The world’s biggest economies are turning a cold shoulder toward Europe’s bailout fund as the G20 prepares to gather in France.
The G20 meeting in Cannes, which starts Thursday, is the latest and most global in a series of urgent leaders’ meetings aimed at negotiating a deal to rescue Europe’s failing economies and the euro-zone monetary union.
European leaders agreed last week to boost the bailout fund, or the European Financial Stability Facility, from €440-billion to €1-trillion. But details on how that will be accomplished remain vague. European governments are reluctant to bolster their own commitments to the fund, which provides loans to cash-strapped countries and banks. Meanwhile, countries ranging from China to Canada are now expressing a reluctance to contribute.
Private investors, from pension plans to insurance companies, are also hesitating. A spokesperson for the bailout fund said Wednesday that it is delaying a planned €3-billion bond sale – related to Ireland’s financial rescue – until at least next week “due to market conditions.”
Europe has been pressing the fast-growing, emerging-market economies and countries with large reserves – most notably China, but also Japan, Brazil and Russia – to support the EFSF. The head of the fund has met with officials from China and Japan, among other countries, in a bid to drum up more financial support. Some EU officials have stressed how important it is that all G20 members contribute financially, even if in some cases, such as Canada’s, the support would be largely symbolic.
“Canada and the other leading economies and members of [the]G20 have an important role there, not only sharing … the problems that we are facing, but also financially, to participate in the providing of funds that may be necessary to subscribe to the bonds of the European Financial Stability mechanism,” Vital Moreira, a member of the EU Parliament, said in Ottawa Wednesday.
Canada is unlikely to play that role. A spokesman for Canadian Finance Minister Jim Flaherty said that “Canada is not considering any investment in the EFSF.”
Others are also balking at the risk. China’s Vice-Finance Minister said it’s too early for China to discuss further bond purchases from the enhanced rescue fund. “There’s no concrete plans yet, so it’s too early to talk about further investments in these tools,” Zhu Guangyao told reporters in Cannes.
Meanwhile, White House Press Secretary Jay Carney suggested that the focus on obtaining financial help from China is a “sideshow” and that Europe can afford to – and should – fix its own problems. “The focus here is a European problem that requires a European solution, for which the Europeans have the resources and capacity necessary” to solve, he said.
Greek Prime Minister George Papandreou’s decision this week to hold a referendum on the country’s bailout deal has made the market more skeptical than ever that Europe can fix its problems.
The EFSF was created in 2010 to provide financial assistance to euro-area states. It is backed by financial guarantees from those states, and it raises funds by issuing bonds on capital markets. Central banks, governments and sovereign wealth funds have been the biggest investors in the bonds to date, with fund managers and banks also making significant investments. Less than five per cent of funds have come from North America. The majority have come from the euro zone, followed by Japan and other parts of Asia.
Chisholm Pothier, the spokesman for Mr. Flaherty, declined to say whether Canada has previously invested in EFSF bonds. “To protect its financial interests, the government of Canada’s long-standing policy has been to not disclose information on the specific assets it holds as official international reserves,” he said. Mr. Moreira suggested that Canada has previously been an investor.
Earlier this week, Japan said that it will continue to buy EFSF bonds, but it did not commit to increasing the proportion of bonds that it’s been buying.
“No one is ready to make an investment commitment given that a number of key details in the package itself remain undefined,” said Barbara Matthews, a former U.S. Treasury attaché to the European Union. Countries like China, Brazil and Russia have suggested they would support the bailout fund by way of the International Monetary Fund, she said.
The bond sale that the bailout fund delayed Wednesday was meant to raise funds to help finance Ireland’s rescue. But investors have been demanding higher returns given the amount of uncertainty that exists in the wake of Greece’s decision to hold a referendum.
“The vehicle that’s supposed to borrow on behalf of countries that can’t borrow, can’t borrow,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London.
With reports from Dow Jones and Bloomberg