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Fed Considers Bailout for Eurozone to Quell Crisis

By Newsmax Wires   |   Tuesday, 06 Dec 2011 07:34 AM

The Federal Reserve, along with the 17 eurozone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper reported.

Die Welt cited sources close to the negotiations as saying the eurozone central banks could pay at least $134.2 billion into a special fund that could be used for programs for nations struggling to control their debts.

"Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs," the paper reported.

Treasury Secretary Timothy Geithner is expected to discuss the idea when he visits Europe, the newspaper reported. Along those lines, Geithner arrived in Germany today for a three-day blitz of eurozone officials to urge them to take decisive action to backstop their currency union and resolve a crushing debt crisis.

Geithner will press French President Nicolas Sarkozy, the new leaders of Spain and Italy, and Germany's finance minister to agree at a crucial European Union summit on Friday to take steps that will give markets confidence that no eurozone countries will default and that the region's banks will stay solvent.

The idea is for the IMF to be able to match the new firepower of the eurozone bailout fund, which is being leveraged.

One senior eurozone official has said that no amount had been discussed at the political level.

The eurozone wants to boost the IMF's resources so the fund could provide a credible backstop if Spain and Italy were to need an emergency loan program.

A Treasury official had said on Friday that the United States was not planning to make bilateral loans to the IMF and the lender's resources were adequate.

Geithner has made several trips to Europe in recent months as U.S. concerns over the crisis grow and, judging by comments from both him and President Barack Obama, the Treasury secretary may add to a growing chorus calling for the European Central Bank to take more decisive action to resolve the crisis, according to Reuters.

Underscoring the need for action was Standard & Poor's warning on Monday that 15 of the 17 eurozone countries now face an unprecedented mass downgrade if they fail to reach a satisfactory agreement at the Brussels summit — all the way up to AAA-rated Germany and France.

Obama's administration is increasingly concerned that Europe's crisis will strike a substantial blow to the U.S. economy, halting weak job growth and potentially threatening Obama's re-election hopes.

The Federal Reserve joined with the European Central Bank and others in action to ease dollar funding strains a week ago, and Obama and Geithner have pointed to the option of the ECB’s backstopping European governments and the banking system. Many economists view the idea as the key to any comprehensive solution to the crisis, but Germany resists it.

"With this trip, I think the secretary will bring the message that time is running out and this is the last chance the Europeans have to fix the situation before we have a full-blown systemic crisis," said Domenico Lombardi, a former International Monetary Fund board member who is now a scholar at the Brookings Institution in Washington.

"I think the U.S. tone will be much more firm — it has changed from being more interlocutory to more authoritative," Lombardi told Reuters.

Sarkozy and German Chancellor Angela Merkel met Monday to enforce budget discipline across the eurozone. Their proposal, announced on Monday, includes automatic penalties for states that fail to keep deficits under control and an early launch of a permanent bailout fund for euro states in distress.

Officials had said on Saturday that talks on the size of loans from eurozone central banks were starting at a technical level after finance ministers from the currency union gave the go-ahead to explore the idea.

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