Hopes that a summit of G20 leaders in Cannes might help put an end to the eurozone debt crisis were dashed on Friday as nations failed to agree on the necessary measures.
Global markets slumped and Italian bond yields soared as the summit drew to a close amid fears that contagion could not be contained.
Expectations had been raised on Thursday that leaders would commit to a sizeable boost in resources for the IMF to grant it enough firepower to deal with the fallout from any contagion of larger eurozone economies.
Although G20 leaders pledged they were “ready to ensure additional resources could be mobilised [to the IMF] in a timely manner”, they failed to outline a precise amount, or how the funds would be disbursed.
The summit ended without any firm pledges from non-eurozone members to contribute to the European Financial Stability Facility (EFSF), the eurozone’s bail-out fund.
Although leaders tried to put on a brave face following the summit, most could barely conceal their disappointment at the outcome.
Brazilian president Dilma Rousseff acknowledged that the G20 meeting hadn’t been “an absolute success”. “There was some progress regarding the European Union and the way it faces the crisis. I do not think it was a failure, but rather a relative success,” she said.
British prime minister David Cameron, who on Thursday had backed an increase in IMF funding, suggested that a lack of agreement over IMF funding commitments among G20 leaders had made a firm announcement impossible.
"The very worst thing would be to try and cook up a number without being very specific about who was contributing what,” he said.
He added: “I would say that some progress has been made but we need more detail on the European firewall, more action on outing it into place to show that decisive confidence-building action that will make a difference.”
He urged euro area leaders to take “decisive action” on Greece, recapitalize the zone’s banks in a “credible and timely fashion” and to build up a strong firewall to prevent contagion.
“What they can’t do is to string this out with another round of endless conversations, discussions and negotiations,” he said. “The world can’t wait for the eurozone to go through endless questions and changes about this.”
IMF managing director Christine Lagarde rejected the suggestion that the G20’s failure to commit a specific amount to the Fund constituted a failure.
“When people talk about a half failure, I would rather speak about half a success,” she said.
“This is not a blank cheque, but a strong commitment. They [IMF members] will do what it takes,” said Lagarde.
A downbeat German Chancellor Angela Merkel, meanwhile, did less to hide her disappointment at a lack of firm funding commitments from non-eurozone members to leverage up the EFSF.
“I think we have an interesting process ahead of us and the discussion is not yet concluded,” she said. “There are hardly any countries that have said already they will cooperate with the EFSF.”
Other eurozone leaders attempted to put a more positive spin on the summit’s outcome. An agreement by Italy to allow the IMF and EU to oversee its progress towards fiscal deficit reduction goals and an about-face by Greek prime minister George Papandreou over a bailout referendum were cited as signs that leaders were pulling together to prevent the crisis escalating.
“Europe has done everything to find credible solutions to the crisis,” said French President and G20 Chair Nicolas Sarkozy.
In an apparent attempt to downplay fears contagion had already spread to Italy, he drew attention to Italy’s monitoring arrangement with the IMF and Brussels.
"I salute Italy’s decision to call upon the European Commission and the IMF to certify the results they have obtained on a quarterly basis, with those results to be made public,” he said, adding: “Italy is an essential state of the eurozone and the world economy."
But investors appeared anything but reassured by the summit’s outcome. As it drew to a close, Italian 10-year government bond yields soared to a new euro-era high of 6.40%, prompting an intervention from the European Central Bank to buy Italian sovereign bonds. Equity markets also fell, with the FTSE Eurofirst 300 down 1.02%, and the FTSE 100 and S&P 500 also down on the day, following two days of gains.
Jose Manuel Barroso, president of the European Commission, acknowledged that investors were likely to react negatively to the outcome of the summit, but suggested that the market reaction was at odds with the political reality.
“Politicians are not always rational but neither are markets. I believe markets are overdoing it now,” he said. “We are stronger now for having come through these difficulties ... We have responded to these events with determination, clearly demonstrating that we will do all it takes to preserve the stability of the euro.”
But Karen Ward, a senior global economist at HSBC, suggested that investors were reacting negatively because the summit had failed to produce any meaningful new measures to reassure markets the eurozone was any better equipped to fight the crisis.
“Ultimately, we are left with the same questions as we had last Friday,” she said. “Is there enough money in the kitty and how will the economies and politicians react as they try to meet the terms?”