The euro zone will tackle its debt crisis this week by offering more cash to the IMF and long-term liquidity to banks, while moving towards tighter fiscal rules, after ratings agency Fitch cast doubt on its capacity to respond decisively.
"We all know that Europe has not been able to convince markets that its governance set-up and its measures against the crisis were enough," Italian Deputy Economy Minister Vittorio Grilli said in a newspaper interview published on Sunday.
"More integration and more effective instruments are needed. We are not yet there," he told Il Sole 24 Ore.
In Singapore, spot silver fell 2% to $29.08 an ounce early on Monday amid a broad retreat in commodities and equities in reaction to the warning by Fitch that it might downgrade France and six other euro zone countries.
The euro also fell in Asia on concern about progress towards resolving the euro zone's debt crisis. The euro was down 0.3% at $1.3004.
Euro zone leaders agreed on Dec. 9 to write into national constitutions a rule that budgets have to be balanced or in surplus in structural terms. If they are not, automatic corrective measures would follow.
Such rules would sharply limit government borrowing, bring down debt and, euro zone politicians hope, help restore market trust in the sustainability of public finances.
But constitutional changes will take a year or more and markets want reassurance now that money invested in euro zone debt is safe, especially after banks were asked to accept a 50% loss on their Greek bonds in October as part of a second bailout of the country which sparked the debt crisis.
To address market concerns that they do not have enough money to prevent the crisis from engulfing Italy and Spain, euro zone leaders brought forward by one year to July 2012 the launch of their 500 billion euro permanent bailout fund.
ECB President Mario Draghi told Monday's Financial Times that euro zone politicians needed to move fast to make the European Financial Stability Fund (EFSF) operational, as any delay would end up raising the cost.
Euro zone leaders also agreed to offer 150 billion euros in bilateral loans to the IMF to raise its crisis-fighting capacity. Up to 50 billion euros more might come from non-euro zone European countries and possibly more from outside Europe.
Euro zone finance ministers will discuss at a Monday teleconference the draft text of the new euro zone fiscal compact so that it can be finalised by the end of January, EU officials said.
There are still doubts about this scheme. Germany's Bundesbank said last week it would only contribute if non-euro zone and non-European countries did too and the level of outside commitment is not clear.
Ministers will also discuss on Monday the voting method in the euro zone's permanent bailout fund, the European Stability Mechanism (ESM).
Leaders decided on Dec. 9 to abolish unanimity in ESM voting to prevent small countries blocking major decisions.
Finland objects to the change, because to accept it the Finnish government would have to have a two thirds majority in parliament, which it does not have.
German Finance Minister Wolfgang Schaeuble tried to show his backing for the permanent bailout mechanism in an interview published on Monday, by saying his country may pay its full contribution to the mechanism next year.
"It is clear that the sooner and the more paid-in capital the ESM has, the more it gains trust on the financial markets," regional paper Rheinische Post Duesseldorf quoted him as saying. "My priority is to create trust."
SOLUTION "BEYOND REACH"
Market response to the Dec. 9 summit has been cool, mainly because of the reluctance of the European Central Bank to step up euro zone bond purchases and declare its readiness to do so.
"While acknowledging the extraordinary measures the ECB has adopted to provide liquidity to the European banking sector, its continued reluctance to countenance a similar degree of support to its sovereign shareholders undermines the efforts by euro area member states to put in place a credible financial 'firewall'," Fitch ratings agency said on Friday.
The ECB, which is forbidden by EU law from directly financing government deficits, welcomed the Dec. 9 agreement on more fiscal discipline in the euro zone, but doused expectations it would ramp up sovereign debt buying in return.
As a result, Fitch concluded that a 'comprehensive solution' to the crisis was technically and politically beyond reach.
Instead of unlimited bond buying, the ECB will offer banks this week an opportunity to borrow money for three years for the first time, extending the current one-year ceiling for refinancing.
France hopes banks will use the money to buy euro zone bonds and ease the upward pressure on yields, but Italy's Unicredit bank said last week this "wouldn't be logical" for banks that are under pressure to reduce risk and rebuild capital.
Fitch warned that six euro zone economies including Italy and Spain could be hit with credit downgrades in the near future. This is the second time in two weeks that the euro zone has been threatened with multiple ratings markdowns after a similar statement from Standard & Poor's.
Fitch said it might also cut AAA-rated France within two years. A poll showed French voters overwhelmingly fear serious damage to the economy if France loses its top rating, despite attempts by President Nicolas Sarkozy to reassure them such a blow would be surmountable.
