US Treasury Secretary Timothy F. Geithner endorsed Europe’s emerging plan to beat the sovereign debt crisis as global finance chiefs pushed for a solution at an Oct. 23 summit of the region’s leaders. Europe’s woes, which are rattling financial markets and threatening the world economy, dominated talks today in Paris between finance ministers and central bankers from the Group of 20 leading economies. The officials urged European chiefs to act “decisively’ at next weekend’s emergency meeting in Brussels and to quell the threat of contagion by maximizing the firepower of their 440 billion-euro ($611 billion) bailout fund. “We heard encouraging things from our European colleagues,” Geithner told reporters after the meeting. “The plan has the right elements.”
Policy makers signaled the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender needs a fillip of cash. “The IMF has a substantial arsenal of financial resources, and we would support further use of those existing resources to supplement a comprehensive, well-designed European strategy alongside a more substantial commitment of European resources,” Geithner said. He added that the US would back more money for the IMF only if a “compelling case” was made as its current $390 billion war chest is “very, very substantial.”
Europe’s Strategy
Europe’s strategy currently includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the newly-enhanced European Financial Stability Facility, people familiar with the matter said yesterday. Optimism the two-year crisis may soon be tamed spurred stocks higher this week and pushed the euro to its biggest gain against the dollar in more than two years. European officials “will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution,” UK Chancellor of the Exchequer George Osborne told reporters. Next weekend “is the moment people are expecting something quite impressive.”
German Finance Minister Wolfgang Schaeuble said his G-20 counterparts welcomed Europe’s “confirmation that we’re aware of our responsibility and we’ll solve the problems in the euro zone.” European Union Economic and Monetary Affairs Commissioner Olli Rehn told Bloomberg Television that euro-area authorities are “close” to an agreement on how to capitalize banks.
‘Heightened Tensions’
The G-20 officials — who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France — said the world economy faces “heightened tensions and significant downside risks” that must be addressed. They vowed to keep banks capitalized and financial markets stable, while reiterating an aversion to excess currency volatility. They also considered shortly naming as many as 50 banks as systemically important, two officials said. Almost two years to the day since Greece set the crisis in motion by announcing it had underestimated its budget deficit, Europe’s latest strategy hinges on putting it on a viable path. Austerity has plunged Greece deeper into recession and provoked civil unrest that threatens political stability.
Italy Targeted
Failure to curb the pain has led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt- strapped nations such as Italy. Investors are concerned that if the crisis is allowed to fester, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. Geithner warned three weeks ago that failure by Europe to act would risk “cascading default, bank runs and catastrophic risk.”
In the works is a five-point plan foreseeing a solution for Greece, bolstering of the EFSF rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.
The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people yesterday. Options include tweaking a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, the people said.
Ultimate Option
Under a more aggressive proposal, investors would exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate option is a restructuring involving writedowns without collateral, they said.
The bank-aid model under discussion is to set up a European-level backstop capitalized by the rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.
Officials are considering seven ways of multiplying the strength of Europe’s temporary rescue fund. The options break down into two broad categories: enabling it to borrow from theEuropean Central Bank or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond insurance more likely, the people said.
EFSF Guarantees
EFSF guarantees of new bonds might range from 20 percent to 30 percent, a person familiar with those deliberations said. Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, people said. ECB President Jean-Claude Trichet, who attended today’s G- 20 meeting, reiterated the central bank hopes to stop purchasing government bonds once the EFSF is able to take over.
A consensus is emerging to accelerate the setup of a permanent aid fund planned for July 2013, the European Stability Mechanism. Next week’s discussions will focus on creating it a year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block bailouts.
