Tags: Geithner | Europe | investors | Crisis

Geithner Urges Europe to Soothe Investors About Crisis

Wednesday, 26 May 2010 03:54 PM

Treasury Secretary Timothy Geithner said on Wednesday that financial markets want to see euro zone countries put into action their $1 trillion standby package designed to stabilize the European currency.

Geithner, on a visit to London, also urged Europeans to work for a globally consistent approach to financial reform as the European Union said it might go it alone with a crisis levy on banks.

After talks with his British counterpart, George Osborne, Geithner said of the EU plan to support indebted states: "It's a good program (and) has got all the right elements. What markets want to see is action."

The fund would provide heavily conditioned loans to euro zone governments that had difficulty borrowing on capital markets after a separate bailout for Greece failed to calm fears of a sovereign debt default in southern European countries.

European shares rallied by 3 percent from Tuesday's nine-month lows and Wall Street was more than 1 percent up but the euro remained under pressure amid continuing signs of banks' reluctance to lend to euro zone counterparts exposed to south European sovereign debt.

Geithner's stress on coordination of new regulation appeared aimed chiefly at Germany, Europe's biggest economy, which stunned markets and angered EU partners by unilaterally banning some speculative financial trades last week.

He is due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.

On his flight to Europe from China, Geithner told reporters he would "emphasize the importance of a carefully designed global approach" to the next stage of financial reform.

Business television channel CNBC said he would also urge the Europeans to stress test their banks to identify those that need new capital and restore market confidence in the banking system.

The executive European Commission outlined a framework on Wednesday for a levy on banks' assets, liabilities or profits to pay in advance for the cost of future crises, setting the stage for a showdown on the tax at G-20 summit in Toronto next month.

"On this question, we can go forward by ourselves, on our own," Barnier told Reuters. "It is not up to the United States to pay for the financial stability of Europe."

The Commission said the proceeds of a bank levy should be ring-fenced for national bank resolution funds, putting Brussels at odds with France and Britain, which want the money to help strapped national budgets.

Fears that Europe's debt crisis could engulf some banks have made them reluctant to lend to each other as happened during the 2007-2009 financial crisis.

The costs for banks to borrow dollars from each other crept up to a new 10-month high on Wednesday.

Money markets are "pricing in for a credit crunch," said Michael Pond, Treasury strategist at Barclays Capital in New York. "A crisis of confidence is developing once again."

The Paris-based Organization for Economic Co-operation and Development said the global economy was recovering faster than expected from recession with Asia leading the way but remained at risk from huge debts in developed countries.

The OECD survey was relatively upbeat about the euro zone, forecasting growth of 1.2 percent this year and 1.8 percent in 2011 — a more optimistic forecast than the European Commission's 0.9 and 1.5 percent respectively.

The OECD also said banks remained vulnerable, noting the high price of credit default swaps to protect bond investments.

European regulators conducted a confidential assessment of the solvency of national banking systems last September, but their reassuring conclusion failed to dispel doubts because they did not test individual banks or publish detailed findings.

Any European stress tests would have to differ from those conducted by U.S. regulators early last year, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found.

A senior U.S. Treasury official said Washington was unhappy with Berlin's "counter-productive" decision to go it alone in banning naked shorting of shares in top financial companies and sovereign euro bonds and related transactions in sovereign credit default swaps.

Geithner has also criticized European Union proposals to regulate hedge funds and private equity, warning that they could discriminate against non-European funds.

Far from yielding to widespread criticism, Berlin proposed on Tuesday extending restrictions on such speculative trades to include all shares, a government source said.

In the latest move in a German-inspired Europe-wide austerity drive meant to restore market confidence, Italy's cabinet approved a multibillion-euro package of budget cuts designed to slash the government's deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012.

The 24 billion euro ($29.49 billion) plan includes a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five leavers.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Italy's budget cuts were "very significant" and would help restore confidence in the euro zone. Credit ratings agencies Standard and Poor's and Moody's both said the package put Italy's finances on a sounder footing and should assure markets.

Italy's largest trade union, CGIL, with about five million members, said it would decide on a national strike after evaluating the measures to be presented by Prime Minister Silvio Berlusconi later on Wednesday.

© 2019 Thomson/Reuters. All rights reserved.

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Treasury Secretary Timothy Geithner said on Wednesday that financial markets want to see euro zone countries put into action their $1 trillion standby package designed to stabilize the European currency. Geithner, on a visit to London, also urged Europeans to work for a...
Wednesday, 26 May 2010 03:54 PM
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