EU pressures ECB, IMF to stop financial rot

(BRUSSELS) - European Union finance ministers stepped up pressure on Wednesday on the European Central Bank and the IMF to stop the eurozone debt crisis from bringing down the global financial system.

As the eurozone posted record 10.3-percent unemployment and the head of the French central bank said a full-blown financial storm is brewing, fears are rising that Italy needs a massive bailout.

With EU leaders staging a critical summit next week to prevent the 17-nation eurozone from breaking up into strong and weak countries, governments are turning towards the potentially unlimited firepower of the ECB as well as the global rescue body, the IMF.

"We are now entering a critical period of 10 days to complete and conclude the crisis response of the European Union," said the the 27-state union's commissioner with special responsibility for the euro crisis, Olli Rehn.

Finance ministers, holding a second day of talks on the crisis, admitted that EU governments could not save the eurozone on their own after they failed to ramp up their own bailout fund to one trillion euros.

"There is some room also for the European Central Bank to maneouvre," Swedish Finance Minister Anders Borg told reporters. "We need to keep all options on the table."

He said all International Monetary Fund member-contributors had to increase their input, adding that "if there were specific European institutions taking a step in that direction that would also be a step way forward."

Eurozone ministers who met separately on Tuesday night spoke primarily of a plan to boost rescue funding via bilateral loans from European countries -- most euro states, and also some non-euro -- to the IMF.

These in turn would be used by the world rescue lender to bail out or protect Mediterranean giants Italy and Spain, should they or any other country require a bailout.

Contagion on bond markets is also increasingly toying with France, the No. 2 eurozone economy and the last line of defence for the EU's biggest economy and political paymaster Germany.

But despite a pact last week at these highest levels to stop publicly pressuring the politically independent ECB, the need for the Frankfurt-based euro guardian to step up to the plate was underlined by several ministers.

Belgium's Didier Reynders said finding a solution that would deliver a big enough pot of money to deal with debts that easily dwarf existing bailouts for Greece, Ireland and Portugal would need "the central bank as well as the IMF."

Austria's Maria Fekter meanwhile noted that the IMF, which itself has limited resources, little more than the 440-billion-euro headline depth of the European Financial Stability Facility (EFSF), has other problems also on its plate.

She cited non-euro Hungary and Tunisia, saying: "We as Europeans have to keep in mind that the IMF is a worldwide organisation, it is not only for the eurozone."

The biggest obstacle to boosting IMF lending capacity is a reluctance by the United States, which is itself wrestling with what to do about runaway historic debts in anticipation of a renewed downturn.

"We are now looking at a true financial crisis -- that is broad-based disruption in financial markets," said Bank of France governor and a member of the European Central Bank governing council Christian Noyer in Singapore.

"We are facing a financial crisis, not a monetary one."

Eurozone ministers late Tuesday granted the 440-billion-euro European Financial Stability Facility (EFSF) new weapons as part of efforts to increase its firepower but they were unable to obtain their targeted total, through insurance-based leveraging and special spin-offs designed to attract overseas public and private investors.

"The conditions have changed, so it will probably not be one trillion euros ($1.33 trillion) but less," said Luxembourg Premier Jean-Claude Juncker.

But EFSF chief Karl Regling warned: "All of this is unpredictable, and market conditions will also change over time, so that's why it's not possible to give one number."

European and Asian markets slipped on the news following recent gains.

With Germany opposed to allowing the ECB to act as a lender of last resort, by buying up government debt massively and indirectly financing government spending, the eurozone is looking to the IMF for help.

"We agreed to rapidly explore an increase of the resources of the IMF through bilateral loans," Juncker said, adding that the goal would be to allow the IMF to match the firepower of the EFSF and cooperate more closely with it.

Rehn said Tuesday that bilateral loans would be provided by European states at this stage.

The aim is to circumvent a ban on the ECB providing direct aid to countries in trouble.