Italy's prime minister, Mario Monti, has pledged that UK taxpayers will not be asked for bailout funds following his commitment to spending cuts and labour market reforms that he believes will eliminate Rome's budget deficit by next year.
After a meeting on Wednesday in London with David Cameron, Monti said UK taxpayers had not provided bailout funds to Italy so far and that there was no reason why he would ask for them in the future.
His comments came after the International Monetary Fund warned it needed at least $500bn (£324bn) in extra funds to support indebted countries, including members of the eurozone, should they be locked out of international money markets. The Washington-based global lender confirmed on Wednesday that it was looking to boost funding to $1tn, a shift that would require as much as £19bn from the UK on a proportional basis.
Fears that Italy will be forced to seek a bailout from the European Union and the IMF have heightened uncertainty over the future of the single currency.
Germany has come under scrutiny, despite its reputation as a safe haven, following concerns that it may be forced to act as lender of last resort to the entire eurozone. Ratings agency Egan-Jones downgraded Germany's sovereign debt last night by one notch to AA-, citing the large financial burden being imposed on Berlin as the main reason.
Monti is due to attend a crisis meeting of the 27 EU states in Brussels on 30 January to thrash out a closer fiscal union. The pact could provide a platform for the European Central Bank (ECB) to provide €1tn in cheap financing to banks and nations desperate to refinance existing loans.
Italy's new technocratic government is against a fire sale of state assets to fund its next budget. Monti said structural reforms to spur growth would underpin his drive to cut the country's debts. "We both believe – the UK and Italy – that adherence to fiscal discipline is a necessary condition for growth. It is not, however, a sufficient condition. And we both believe that not only our individual countries but the EU as a whole has a big role to play … to foster economic union in a sustainable way."
A draft fiscal pact has already been criticised by the ECB for being too weak. But the Finnish government has taken the opposite stance and criticised the pact for going further than Helsinki can stomach in overriding national sovereignty.
The UK government wants a viable pact in place before agreeing to any IMF request for funds. The Commons has already given the Treasury leeway to draw down an extra £10bn to give the IMF, but anything further would require a fresh vote in the Commons – and be likely to prompt a backbench Tory rebellion.
Ed Balls, the shadow chancellor, has said Labour will vote against extra cash if there is no serious sign that the EU is taking action to strengthen the euro, specifically through further interventions by the ECB. Balls would also like to see a shift in broader European economic policy so there is less emphasis on austerity and more on securing growth. The previous increase in IMF funding last summer was passed in the Commons by 274 votes to 246, despite a rebellion by 32 backbench Tory MPs.
Boris Johnson, the mayor of London, said on Wednesday after addressing the 1922 committee of Tory MPs that he favoured an orderly default on Greece's debts. Asked about increasing UK contributions to the IMF to help the eurozone, he said: "Everybody understands that the euro probably needs a resolution of one kind or another. It's my own belief … that [resolution] won't be achieved by endlessly bubblegumming the thing together and that some kind of orderly readjustment is necessary."
An IMF spokesman said: "Based on staff's estimate of global potential financing needs of about $1tn in the coming years, the fund would aim to raise up to $500bn in additional lending resources. This total includes the recent European commitment of about $200bn in increased fund resources. At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the fund's membership have been completed."
No 10 said the IMF had put no practical proposals forward so it was premature to discuss the scale of any UK contribution.
The scale of the UK contribution is unclear, but Britain traditionally contributes 4.5% to any IMF funding call, and in this case the Americans have said they will not contribute.
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