Geithner presses EU to act decisively

Speaking after discussing with ministers the possibility of leveraging the euro zone’s bailout fund to give it more clout to tackle the region’s debt problems, Geithner said Europe would not see similar global financial coordination as there was in 2009, but that Washington would do what it could to help.

“What is very damaging in Europe from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need both to work together to do what is essential to the resolution of any crisis,” he said.

“Governments and central banks have to take out the catastrophic risks from markets and avoid loose talk about dismantling the institutions of the euro.” The ECB reluctantly agreed last month to buy the bonds of Italy and Spain after they came under market attack on the understanding the bloc’s bailout fund, the European Financial Stability Facility, would soon take up the cudgels.

Even that was too much for some in the ECB, with the top German official at the bank, Juergen Stark, announcing his resignation last week. Geithner said he had told euro zone finance ministers that they had the capacity to deal with the now nearly two-year-old crisis, but had to improve their coordination. “We don’t want to see Europe weakened by a prolonged crisis, better for us if Europe is stronger,” he said. “We will continue to do as much as we can to help Europe manage these challenges.”

Earlier, a senior euro zone official said Geithner had urged ministers to look at leveraging the 440 billion euro EFSF, to make it more effective at calming the sovereign and banking-system liquidity problems.

Geithner provided no details but Jean-Claude Juncker, the chairman of the Eurogroup countries, said euro zone governments would push ahead with approving decisions taken on July 21 to resolve the crisis, which include making the EFSF more flexible.
“We are taking strong actions to maintain financial stability, restore confidence and support growth,” Juncker told reporters.

He said adjustment programmes in Ireland and Portugal, which have both been bailed out, were on track and that Greece’s renewed commitment to its program meant that a decision on its next disbursement would be taken in October. Financial markets were largely stable with the spread between Italian 10-year bonds and benchmark German Bunds narrowing slightly. Stocks, buoyed by a decision on Thursday by the ECB and other major central banks to reintroduce three-month dollar liquidity, were up.

Analysts say the EFSF, set up in May 2010 and so far used to bail out Portugal and Ireland, must be increased in size to build market confidence that the debt crisis can be contained.

But Germany and others refuse to bolster the fund and most euro zone national parliaments have yet to ratify new powers agreed for the fund two months ago that would allow it to make precautionary loans to countries under attack and buy sovereign bonds to prop up struggling states.

“It is difficult for the euro zone to come up with anything concrete at this stage but they need to keep up the momentum,” said national Australia Bank market strategist Gavin Friend.