Further embarrassment as one trillion euro bailout fund announced yesterday does not really exist.
Europe is holding out the begging bowl to China in an effort to keep the rescue package for the single currency alive.
In a clear sign of how the balance of world power has tipped towards the East, EU leaders hope China can be persuaded to hand over huge sums to help bail out the eurozone.
In a further embarrassment, it emerged that the one trillion euro bailout fund announced in the early hours of yesterday does not really exist.
The pot contains only a quarter of that amount, and the rest of the money likely to be ‘leveraged’ – using the existing 250billon euros as security to borrow the rest.
Markets initially reacted with relief after all-night talks on the debt crisis engulfing the eurozone ended with agreement on a three-part package of measures after weeks of bickering.
EU leaders said they would boost an existing euro bailout fund to at least £880million (a trillion euros), recapitalise dangerously exposed European banks and write off half of Greece’s towering debts.
But in the cold light of day, it became clear that there were almost no details on how the bailout mechanism, supposed to act as a guarantor for debt-stricken countries in danger of defaulting on what they owe, might operate.
Eurozone leaders said they hoped to ‘leverage up’ the cash left in the fund, already called upon by Greece, which totals around £200million. Germany, other rich eurozone nations and the European Central Bank refused to put more money in to the pot.
Humiliatingly, it emerged that French president Nicolas Sarkozy had telephoned the Chinese leader Hu Jintao yesterday to ask for investment and backing in the European fund.
But Chinese officials said they resented being seen as ‘just a source of dumb money’, and chillingly suggested they would insist that criticism of their economic policy is silenced in exchange for offering assistance.
Li Daokui, a member of China’s central bank monetary policy committee, said: ‘It is in China’s long-term and intrinsic interest to help Europe because they are our biggest trading partner but the chief concern of the Chinese government is how to explain this decision to our own people.
‘The last thing China wants is to throw away the country’s wealth and be seen as just a source of dumb money.’
There are fears that the debt crisis across Western economies marks a tipping point as power moves to the East. China, the world’s leading economy for 18 of the last 20 centuries, is on course to overtake the U.S. again in around 2015.
In the Commons, Chancellor George Osborne insisted Britain would contribute no money to the EU bailout fund, or a new ‘special purpose investment vehicle’ which is expected to be administered by the International Monetary Fund using cash from other countries and investors.
But he confirmed that Britain, already one of the largest contributors to the IMF, would be ready to contribute further resources if it needs more cash to lend to indebted economies around the world.
‘Supporting countries that cannot help themselves is what the IMF exists to do,’ Mr Osborne said. ‘There may well be a case for further increasing the resources to the IMF to keep pace with the size of the global economy. And Britain stands ready to consider the case for further resources and contribute with other countries if necessary.
‘We are only prepared to see an increase in the resources that the IMF makes available to all countries of the world. We would not be prepared to see IMF resources reserved only for use by the eurozone.’
Mr Osborne said ‘good progress’ had been made towards rescuing the eurozone but warned that ‘much detail remains unresolved’.
Former Labour Chancellor Alistair Darling warned there appeared to be no commitment from the eurozone to provide real cash – suggesting instead they were trying to create ‘a sophisticated financial instrument of the sort that might have contributed to the problems in the first place’.
Mr Osborne admitted: ‘I fear that we are looking at a sophisticated financial instrument here. However, it is clear that Germany and the Bundestag were not prepared to provide further resources. The European Central Bank was not prepared to provide those resources either.
‘They have therefore turned to those options to try to leverage up the money they have already committed. That is the sensible choice for them, given those other constraints. They are trying to get other private investors from around the world, potentially including the involvement of sovereign wealth funds, to leverage up the fund.’
Shipley’s Tory MP Philip Davies accused Mr Osborne of ‘dancing on the head of a pin’ by suggesting funds given to the IMF would not end up bolstering eurozone countries.
‘The last drop of goodwill has been used up for bailing out countries in the eurozone through one mechanism or another,’ he said. ‘There is no point trying to bamboozle us with methods. It is not acceptable to bail it out through the back door.’
Amid signs that the entire eurozone will be forced to follow Britain’s lead and impose tough austerity measures, Mr Sarkozy said his Government would soon announce budget cuts of £6billion.
He also said it had been a ‘mistake’ to allow Greece into the eurozone in 2001, but when asked if Greece would emerge successfully from the crisis replied: ‘Yes – we have no other choice.’
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