WRAPUP 2-IMF to urge increase in EU safety net, ECB bond buys

* IMF to urge euro finance ministers to increase safety net

* Germany opposes aid facility increase, euro zone bonds

* Spanish air traffic controllers paralyse airports

(Recasts with IMF report)

By Jan Strupczewski and Noah Barkin

BRUSSELS/DUBLIN, Dec 5 (BestGrowthStock) – The IMF will urge euro
zone governments on Monday to boost the size of their rescue
fund and recommend the European Central Bank buy more bonds to
prevent the bloc’s debt crisis from derailing economic recovery.

According to a report that IMF chief Dominique Strauss-Kahn
will present to euro zone finance ministers at a meeting in
Brussels, the turmoil hitting countries in the currency area’s
southern periphery constitutes a “severe downside risk” and more
action from member states is needed. [ID:nLDE6B40CZ]

Together with the IMF, the EU set up a 750 billion euro ($1
trillion) rescue facility in May, but it now faces pressure to
increase it after last week’s rescue of Ireland failed to ease
fears of contagion to Portugal, Spain and other high-deficit
countries.

The IMF report, a copy of which was obtained by Reuters,
says there is a “strong case for increasing the resources
available for this safety net and making their use more
flexible, including for the purpose of providing more effective
support to banking systems”.

The report also says extraordinary ECB measures to combat
the crisis, including its bond purchasing programme, should be
“expanded” until systemic uncertainties recede.

Government debt purchases by the ECB calmed markets towards
the end of last week, pushing down the borrowing costs of
vulnerable countries on the euro zone’s southern periphery.

But ECB President Jean-Claude Trichet has made clear that
Europe’s politicians should not count on the central bank alone
to solve the bloc’s woes and urged them to take decisive new
steps to prevent contagion. [ID:nLDE6B20AB]

Belgian Finance Minister Didier Reynders, speaking at a
conference in Brussels on Saturday, echoed the IMF in urging his
euro partners to think about boosting the rescue facility, which
would be stretched if Portugal and Spain required bailouts.

Chancellor Angela Merkel’s government, worried German
taxpayers could rebel against paying for more euro zone
bailouts, has said it sees no reason to increase the facility.

Berlin would face intense pressure to drop its objections if
the 12-year-old currency bloc came under renewed attack on
Monday from investors spooked by economic and fiscal divergences
within the euro zone aggravated by the global financial crisis.

PRESSURE FOR MORE AUSTERITY

In a bid to ease market concerns about Spanish finances, the
government of Prime Minister Jose Luis Rodriguez Zapatero
unveiled new measures last week, saying it would bring forward
pension reforms, raise tobacco tax and cut wind power subsidies.

Its plans to sell off a 49 percent stake in state-owned
airports authority AENA provoked a 24-hour wildcat strike by air
traffic controllers that paralysed airports and forced the
government to declare a state of emergency. [ID:LDE6B40A9]

The disruption, which may cost the airline and tourism
sectors hundreds of millions of euros, underscored the difficult
balancing act euro zone governments face as they seek to appease
markets without provoking a public backlash that could end up
denting investor confidence even more.

Portugal, widely seen as the next euro zone “domino” at risk
of a bailout, has resisted announcing new measures on top of a
tough 2011 budget approved last month. [ID:nLDE6B40BR]

Greece, struggling to meet tough deficit targets agreed as
part of its 110 billion euro EU/IMF rescue, is also under
pressure to do more. In a Sunday newspaper interview, its
central bank governor urged the government to step up the pace
of reform, saying Athens should be striving to beat the fiscal
goals set for it. [ID:nLDE6B30CT]

Meanwhile, opposition parties have vowed to renegotiate the
terms of Ireland’s bailout after an election early next year.
Prime Minister Brian Cowen’s deeply unpopular government faces a
crucial vote on its 2011 budget on Tuesday. [ID:nLDE6B119S]

GERMANY REJECTS EURO BREAKUP

German Finance Minister Wolfgang Schaeuble urged vulnerable
countries on the euro periphery to press ahead with painful
economic reforms, telling the Bild newspaper that German fiscal
discipline should serve as a model for the whole bloc.

He rejected suggestions that Germany might be better off if
the 16-nation currency area split up. The Guardian newspaper
reported on Saturday that Merkel had warned fellow EU leaders at
a summit in October that Germany might leave the euro, a story
vehemently denied by the government in Berlin. [ID:nLDE6B3044]

“The costs of that would be far higher than all the measures
we are taking now to defend the euro,” Schaeuble told Bild. “The
economy would suffer and many jobs would be lost.”
[ID:nLDE6B409T]

Germany has rejected calls by Spain to create a “fiscal
union” in the euro zone to ease market concerns about the
imbalances in the bloc. It also opposes the idea of issuing
common euro zone bonds that would reduce the borrowing costs of
weaker euro states, any idea pushed by Jean-Claude Juncker, the
head of the Eurogroup forum of euro zone finance ministers.

(Reporting by Paul Day in Madrid, Justyna Pawlak in
Brussels, Dave Graham in Berlin; Editing by Peter Graff)

WRAPUP 2-IMF to urge increase in EU safety net, ECB bond buys