02/26/2012 06:04 EST | Updated 04/27/2012 05:12 EDT

Official: G-20 to link increased IMF funding to strengthening European Union 'firewall'

MEXICO CITY - The G-20 nations are set to condition additional funding for the International Monetary Fund on the European Union first increasing its financial stabilization funds to ease concerns about debt risks in euro zone countries, a senior official said Sunday.

The official participating in a meeting of G-20 nations' finance ministers and central bank heads said a formal statement to be issued later in the day would require the EU to add about €500 billion ($675 million) in firewall funds before the rest of world considered contributing to the stabilization effort.

The official said the weekend talks had mainly focused on stability for the euro zone, where debt and economic problems have threatened to destabilize global financial markets.

Though no specific amount in firewall funds was discussed, the official said, it must be enough to calm market concerns and should be available to countries before they fully carry out promised fiscal reforms.

While the United States, Brazil and the Organization for Economic Cooperation and Development have already publicly urged an increase, the official said the consensus that the EU must act was much broader, including big potential lender countries like China and Japan. They feel the IMF can play a back-up role, but the EU's own fund must be the first line of defence, the official said.

It appears Germany's reluctance to further fund EU stabilization funds may be the sticking point, largely because the issue is a sensitive one in German domestic politics. Germany is the EU's strongest economy and would probably be the biggest contributor, and the German parliament must still approve the current round of support efforts for debt-plagued Greece.

The official said that other European nations support increasing firewall funds and that even German officials appeared to recognize that would eventually be necessary.

At a later news conference, Mexican Treasury Secretary Jose Antonio Meade noted the euro-zone countries are to assess their stabilization efforts at a March meeting and said the results of that assessment, and possible changes in the size of the firewall funds, would "be fundamental" to how G-20 nations decide on increasing funding for the IMF.

Mexico's central bank head, Agustin Carstens, said the EU decision would be an "essential input" for IMF funding decisions.

U.S. Treasury Secretary Timothy Geithner has been careful to acknowledge the work of EU leaders, saying they have "made quite a bit of progress in convincing the world that they are not going to allow a catastrophic financial failure" in their countries.

But, he added, European leaders have moved slower than many people would have liked. "They are not done. They know they've got more to do," he said.

The Germans remain reluctant.

In a column in the Mexican newspaper El Universal on the eve of the meeting, German Finance Minister Wolfgang Schauble wrote that "should we increase even more the firewalls? The response is a resounding no." Schauble also rejected sharing other euro-zone country debts or expanding the euro money supply to meet countries' budget gaps.

"This would not only not solve the problems of debt and competitiveness that brought the affected countries to their current state of affairs, it would also discourage their governments from carrying out consolidation and reform," he wrote.

German central bank president Jens Weidmann noted Friday that euro-zone political leaders will meet in March to decide whether to further increase the current €500 billion financial stabilization effort, and while he didn't rule out increased funding, he said money alone won't do it.

"Higher walls of money can buy time, but that time must be used to tackle the roots of the crisis," Weidmann said at a seminar prior to the ministers meeting.

"Ultimately, Greece cannot be forced to comply with the program," he said of the indebted country's commitment to make fiscal, wage and other changes in exchange for the EU bailout. "But it should be clear that no further disbursements will be warranted if Greece fails to keep its side of the bargain."