Britain is poised to provide billions of pounds for a new global economic rescue package, prompted by concerns that the EU plan to save the euro will not be enough to stabilise the world economy.
By Robert Winnett, Political Editor in Cannes and Damien McElroy in Athens
10:10PM GMT 03 Nov 2011
A deal being negotiated by world leaders at the G20 summit in Cannes could see the International Monetary Fund (IMF) double in size.
David Cameron will face strong opposition from Conservative MPs over the potential use of taxpayers’ money to assist European countries after repeated assurances from the Government that Britain would not provide extra funds to help the eurozone.
Both the Prime Minister and George Osborne, the Chancellor, insisted that the crisis is so grave that intervention is now required.
“When the world is in crisis, it is right that you consider boosting the IMF, the International Monetary Fund, an organisation founded by Britain in which we are a leading player,” Mr Cameron said.
He added: “I’m here to safeguard the British economy. We have taken difficult decisions at home that have protected us from the worst of the debt crisis, and that’s right.
“But there is a big opportunity here, because if the world could come together and solve some of its problems – the worst of which is the eurozone crisis – then actually that would be a big boost to the British economy.”
Asked why British money should be used to help rescue eurozone countries, Mr Osborne said that taxpayers from around the world, including those in America and China, would be “exposed” under the plan.
“Britain was there at the creation of the IMF,” he said. “At a time of international economic instability it would be very strange for Britain to walk away from the IMF. I don’t think that would be a sensible thing for Britain to do.”
The Chancellor added that G20 negotiations last night were “getting down to the nitty gritty of numbers”. Under IMF rules, Britain would underwrite a portion of loans to struggling countries, but would only pay out if they defaulted.
The deal is expected to be agreed today, with the IMF poised to intervene to prop up Italy and other beleaguered European nations. The eurozone has struggled to raise sufficient funds for its own rescue package. The announcement followed another chaotic day in Greece, where the government appeared on the brink of collapse.
European leaders yesterday attempted effectively to force George Papandreou, the country’s Prime Minister, from office in response to his plans to hold a referendum on whether to adopt the austerity measures that the EU is demanding in return for a rescue package.
There were repeated rumours that he had brokered a deal to step down. Yet last night he was still clinging to power, appealing instead to the main opposition party to join him in a coalition of national unity.
Despite hints from Mr Papandreou that a referendum on the Greek bail-out would be abandoned if the coalition was formed, the opposition walked out of parliament. Antonis Samaras, the opposition leader, demanded Mr Papandreou’s departure. “Mr Papandreou pretends that he didn’t understand what I told him. I called on him to resign,” he declared.
A former governor of the Greek central bank was being lined up last night to take over in the event the government collapses after a no-confidence vote tonight.
Yesterday, Mark Hoban, a Treasury minister, disclosed to MPs that the Government has drawn up contingency plans for the collapse of the euro. He described the single currency as “breaking up”.
World leaders meeting at the summit yesterday had originally been expected to discuss medium-term plans to help improve financial regulation and boost global economic growth.
They have been forced to abandon large parts of the agenda as ongoing discussions about rescuing the single currency have dominated proceedings. President Barack Obama said: “The most important aspect of our task over the next few days is to resolve the financial crisis here in Europe.”
Angela Merkel, the German Chancellor, and Nicolas Sarkozy, the French president, have become increasingly aggressive as they put pressure on Greece to accept the terms of an EU bail-out. Mr Sarkozy is said to be “furious” with Mr Papandreou, privately accusing him of betrayal.
Yesterday, the French president said: “We cannot allow the euro to break up – that would be the break-up of Europe.”
Despite the apparent improvement in the Greek outlook, major doubts have emerged over other parts of the EU bail-out plan. It now seems increasingly unlikely that the EU will be able to persuade other countries to provide money to a “special purpose” investment scheme to lend money to beleaguered European countries. A more modest insurance scheme to underwrite loans is thought to be under consideration.
It is against this background, that the plan to boost the “firepower” of the IMF is now being urgently drawn up. The IMF currently has total funds of almost one trillion dollars. However, it has already lent, or is committed to lend, the majority of its funds and therefore has about $380 billion (£240 billion) of “available” reserves. The cost of a full eurozone rescue has been estimated at almost £2 trillion.
Therefore, for the IMF to be able to intervene in a worst case scenario, which some economists think is increasingly likely, it may have to more than double in size – even with some help from the EU.
British taxpayers will lend money to the IMF, which will in turn loan tens of billions of pounds to European countries. Britain has already agreed to provide up to £29.5 billion to the IMF, the equivalent of £1,000 for every British household. This is now set to rise significantly.
Under the terms of its IMF engagement, Britain underwrites 4.2 per cent of any bail-out funds.