In the wake of the global credit crisis, the funding of the IMF tripled and Britain’s exposure to it rose to £20 billion. This figure is poised to rise again if financial troubles engulf bigger economies such as Italy and Spain.
Yesterday, Alistair Darling, the former Labour chancellor who was in office during the previous crisis in 2008, warned that the problems facing the global economy were worse than three years ago.
“There are lessons to be learnt, and they are not being learnt by those responsible at the moment,” he said. “Lehmans [the investment bank that collapsed in September 2008] taught us one thing which is if you know there is a problem, take action, sort it out [in a way] that is more decisive than people expect if you are going to stop it.
“The problem with the Greek crisis is that it has been allowed to run on and on and on.”
This week could prove crucial in the attempts by European leaders to get a grip on the Greek economic crisis, and financial markets are braced for another turbulent few days. Germany and Greece will have detailed negotiations over an emergency rescue package for the Mediterranean country before a German vote on Thursday to approve a new eurozone bail-out plan. There is growing German anger at helping southern Europe, which will effectively involve taxpayers underwriting other countries’ debts unless they agree to sweeping reforms.
Greece may be allowed to go bankrupt and write off some of its debts with other loans restructured and guaranteed by a eurozone bail-out fund. Banks in several countries, including France, may also be recapitalised, although the French central bank chief insisted yesterday that taxpayers’ money would not be used.
In total, the scheme could cost up to £2 trillion, and the IMF is also expected to be involved. During talks in Washington, Mrs Lagarde warned that the IMF may need to extend it $400 billion war chest.
“The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-case scenarios,” Mrs Lagarde said in an “action plan” circulated to IMF executives. She added that lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders”.
George Osborne, the Chancellor, has managed to keep Britain from contributing to future eurozone bail-outs, but the Government is likely to agree to any request to increase IMF funds.
The Chancellor returned from Washington over the weekend after setting a six-week deadline for European leaders to tackle the crisis.
In an interview yesterday with the American ABC television network, David Cameron said that public spending cuts would not be watered down.
“The British economy has grown this year,” the Prime Minister said. “If we hadn’t got on top of our deficit and shown the world we have a plan to make our economy pay properly for itself, then we would have seen interest rates go up and confidence sapped out of our economy.
“We have to understand this is a debt crisis, it’s not a traditional cyclical recession where you can just turn on the money tap. We’ve got to deal with the debts, we’ve got to show the world we can pay for our debts.”
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