Europe struggles with rescue fund, may turn to IMF

Eurozone ministers struggled to ramp up the firepower of their rescue fund and looked to the IMF for more help on Tuesday after Italy's borrowing costs hit a euro lifetime high of nearly 8 percent. Two years into Europe's sovereign debt crisis, investors are fleeing the eurozone bond market, European banks are dumping government debt, deposits are draining from south European banks and a looming recession is aggravating the pain, fuelling doubts about the survival of the single currency.
---- Italy pays near 8pc to sell bonds; PM to outline plans
---- S&P may cut France's rating outlook to negative
---- ECB fails to fully offset eurozone bond purchases
Italy had to offer a record 7.89 percent yield to sell 3-year bonds, a stunning leap from the 4.93 percent it paid in late October, and 7.56 percent for 10-year bonds, compared with 6.06 percent at that time. The yields were above levels at which Greece, Ireland and Portugal applied for international bailouts, but European stocks and bonds rallied in apparent relief at the strong demand, with the maximum 7.5 billion euros sold. "In an ideal world, these yields ... would serve to give the Ecofin/Eurogroup a sense of added urgency, but this is a far from ideal world," said Peter Chatwell, rate strategist at Credit Agricole in London.
The euro had earlier dipped on a report in business daily La Tribune that ratings agency Standard & Poor's would lower its outlook on France's AAA credit rating to negative within 10 days, dealing a potential body blow to the euro zone's ability to rescue heavily indebted countries.
In Brussels, Eurogroup ministers were expected to approve detailed plans to bolster their bailout fund to help prevent contagion in bond markets, but looked set to fall short of market expectations. Ministers said the International Monetary Fund may have to provide more help, possibly bolstered with more European money. "We will have to look at the IMF which can also make available additional funds for the emergency fund. I think countries in Europe and outside of Europe should be prepared to give more money to the IMF," Dutch Finance Minister Jan Kees de Jager told reporters.
The ministers will agree details of leveraging the European Financial Stability Fund (EFSF) so it can help Italy or Spain should they need aid, although worsening market conditions mean it is likely to fall short of the original 1 trillion euro target.
The report about France's credit rating came at a delicate time. Paris is the second largest guarantor of the EFSF bailout fund, and one of only six AAA states in the eurozone. S&P declined comment. Officials said the leveraging mechanisms could become operational in January, but that may be too late.
"We have talked about leverage though private money, but it would be two or two and a half times an increase so not sufficient and we have to look for other solutions to compliment the EFSF and that in my mind will be the IMF," de Jager said. With Germany opposed to the idea of the European Central Bank providing liquidity to the EFSF or acting as a lender of last resort, the eurozone needs a way of calming markets and the ECB shows no sign yet of responding to widespread calls to massively increase its bond-buying.
A Reuters poll of economists showed a 40 percent chance of the ECB stepping up bond-buying with freshly created money within six months, something it has opposed. The poll forecast a 60 percent chance of an ECB rate cut to 1.0 percent next week and a big majority of economists said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat at its December 8 meeting.
New Italian premier Mario Monti was to outline his fiscal and economic reform plans to the Eurogroup of 17 eurozone finance ministers amid reports, officially denied in Rome and Washington, of a possible impending approach to the IMF. Italy has a 1.9 trillion euro debt pile - equivalent to 120 percent of national output - and needs to refinance some 340 billion euros of maturing debt next year with big redemptions starting in late January. It has promised to balance its budget in 2013 but Tuesday's auction suggested it will struggle to keep borrowing costs under control without international help.
German Chancellor Angela Merkel will not make a deal at a December 9 European Union summit to stop resisting joint issuance of eurozone bonds in exchange for progress on strengthening fiscal rules, German MPs quoted her as saying. She told a closed-doors meeting Europe was "a long way from euro bonds", suggesting they may not be ruled out forever.