Proposals to double the size of the IMF as part of a broader international response to Europe's debt crisis ran into resistance from the United States and others, burying the idea for now and putting the onus firmly back on Europe.
The outlines of the plan that had the backing of several developing economies emerged as G20 finance ministers and central bankers met in Paris to discuss a world economy under threat from European nations mired in debt.
A second day of talks on Saturday may produce more robust language on the urgency of tackling the euro zone debt crisis but little of substance is likely to be inked in with an EU summit in nine day’s time the make-or-break moment.
A communique and round of closing news conferences are expected around 1500 GMT with other decisions set up for a G20 leaders’ summit in Cannes on Nov. 3/4.
One G20 source said emerging market policymakers backed injecting some $350 billion into the International Monetary Fund.
U.S. Treasury Secretary Timothy Geithner and his Canadian counterpart poured cold water on the idea. The IMF’s dominant shareholders, including the United States, Japan, Germany and China, are content that the fund’s $380 billion worth of resources is enough.
"They (the IMF) have very substantial resources that are uncommitted," Geithner said.
German Finance Minister Wolfgang Schaeuble agreed the euro zone debt crisis was for Europe to solve, and expressed confidence that EU leaders would produce a plan at the Oct. 23 summit that would be convincing for financial markets.
The United States is among countries keen to keep pressure on the Europeans to act more decisively to end the two-year-old debt crisis that began in Greece but has since spread to Ireland and Portugal and is lapping at Spain and Italy.
"The first priority here is for Europeans to put their own house in order," Australian finance minister Wayne Swan said, though his office in Canberra later released a transcript of a CNN interview in which he added that the G20 should be willing to support extra IMF resourcing if required.
Canadian Finance Minister Jim Flaherty also said the G20 should keep up pressure on the euro zone on its "arduous" journey towards a solution and not focus on IMF resources.
If minds needed concentrating further, Standard and Poor’s cut Spain’s long-term credit rating, citing the country’s high unemployment, tightening credit and high private sector debt, highlighting the risk of a much larger economy than Greece coming under threat.
French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for the European Union summit.
Fears about the damage a default by Greece — and possibly others — could inflict on the financial system have driven a confidence-sapping bout of market volatility since late July, with global stocks falling 17 percent from their 2011 high in May.
Unlike in 2009 when the G20 launched coordinated stimulus to pull the world out of crisis, the rest of the world is chafing at Europe’s slow response while Washington and Beijing are sparring over the yuan currency.
The Franco-German crisis plan is likely to ask banks to accept bigger losses on their Greek debt than the 21 percent spelled out in a July plan for a second bailout of Athens, which now looks insufficient.
"It will be more, that’s more or less certain," French Finance Minister Francois Baroin said.
It should also lay out a system for recapitalising banks and plans to leverage the euro zone’s 440 billion euros European Financial Stability Facility to give it more punch.
Schaeuble said European banks should be helped, if necessary, with state means to strengthen their capital.
Whilst the EFSF has the resources to cope with bailouts for Greece, Portugal and Ireland, it would be overwhelmed by the need to rescue a bigger economy such as Italy or Spain.
The most effective method would be to turn the EFSF into a bank so it could draw on European Central Bank resources. Both Germany and the ECB are opposed to that. Attention has turned to the idea of making the fund more like an insurer.
For example, if the EFSF covered the first 20 percent of losses a bank could suffer in case of a default — it could multiply its firepower fivefold to over 2 trillion euros.
ROLE OF IMF
G20 sources said most BRICS economies were in favour of bolstering the IMF’s capital as a crisis-fighting tool.
"We have said this before and have conveyed this again, that if emerging economies and the BRICS are called upon to contribute, we can do it via the International Monetary Fund," one of the sources said. "India is open to it, China and Brazil are also okay with the idea."
Another G20 source said the IMF would present a plan which had broad support to its executive board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises. It could aid euro zone countries hit by the current crisis of confidence in the bloc’s sovereign debt.
Any real progress on bigger goals such as setting parameters to measure global imbalances and reining in speculative capital flows is unlikely to come before a Nov. 3-4 summit in Cannes, where France passes the G20 baton to Mexico.
A French finance ministry source said that for Cannes, France hoped to have two or three measures agreed for countries showing imbalances: consolidation measures for those with high deficits and stimulus measures for those with surpluses.
"We are going to try to make some progress and obtain, perhaps not tomorrow or Saturday but by Cannes, a list of measures country by country," he said. "These must be measures which will have an impact on the real economy."
A separate G20 source said after preparatory talks late on Thursday that China would commit to boost its consumption through a five-year plan, via households and companies as well as infrastructure.
The G20 countries make up 85 percent of global output.
An April G20 meeting placed seven large economies under review — the debt-burdened United States, export driven China and the economies of France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China’s cooperation is essential to the success of the process.
A G20 official said China would not commit to a quick liberalisation of its yuan currency to help rebalance global growth, but would offer to use expansionary fiscal policy to fuel domestic demand.
"No, they were pretty firm on that — there will be no progress," the official said.