Geithner presses EU to act; meets resistance

Treasury Secretary Timothy Geithner urged EU finance ministers on Friday to leverage their bailout fund to better tackle the debt crisis, but there was no agreement on what steps should be taken.

In a 30-minute meeting with euro zone ministers, Geithner pressed for the 440 billion euro European Financial Stability Facility to be scaled up to give greater capacity to combat the problems infecting Greece, Portugal, Italy and other states, a senior euro zone official familiar with the discussion said.

But ministers were resistant to Washington telling the 17-country euro zone and its finance chiefs what they should do.

"He conveyed dramatically that we need to commit money to avoid bringing the system into difficulty," Austria's Finance Minister Maria Fekter told reporters after the meeting.

"I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, that they tell us what we should do and when we make a suggestion ... that they say no straight away."

She said there had been particular disagreement over suggestions that Europe should commit more money to fighting the crisis. When German Finance Minister Wolfgang Schaeuble explained that would not go down well with taxpayers and that the only way to fund it would be a financial transaction tax, Geithner ruled any such tax out.

"In these countries, there is a desire for a transaction tax," Fekter said. "(Geithner) ruled that out."

While no one described the gathering as ill-tempered or heated, it appeared clear from the reaction afterwards that Geithner and the Europeans did not see entirely eye-to-eye.

Jean-Claude Juncker, the chairman of the Eurogroup, said he was not prepared to discuss issues privy to the euro zone with someone from outside the currency bloc.

"We are not discussing the expansion or increase of the EFSF with a non-member of the euro area," he told reporters.

Belgian Finance Minister Didier Reynders was also pointed in his comments: "I'd like to hear how the United States will reduce its deficits ... and its debts," he said.

"End Loose Talk"

The precise details of what Geithner laid out to the ministers were not clear. Speaking to a group of policymakers and bankers after the meeting, the treasury secretary said the EU needed to end "loose talk" about a break-up of the euro and work more closely with the European Central Bank on solutions.

"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 EFSF would soon take up the cudgels. Even that was too much for some in the ECB -- the top German official at the bank, Juergen Stark, announced 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."

In their news conference after finance ministers met alone to discuss the specifics of the crisis, Juncker and the European commissioner for monetary affairs, Olli Rehn, focused on how assistance to Portugal and Ireland was on track and on the need for Greece to stick rigidly to the commitments it has made.

Inspectors from the ECB, EU and IMF are currently in Athens and should report back on progress in early October, Rehn said, meaning that the next disbursement of aid to Greece from its first bailout could be paid by mid-October.

"The intention is to meet the fiscal targets for this year and next year without delay, without exception and deviations," Greek Finance Minister Evangelos Venizelos told reporters.

World shares rose one percent to one-week highs on hopes that European policymakers might at last come up with lasting measures, and still buoyed by Thursday's move by the ECB and other top central banks to offer more dollar liquidity to banks.

But the euro gave up some of the gains seen in the previous session.

"All the headlines that are coming out of the Ecofin meeting are pretty negative and the euro's resilience after the coordinated action from central banks on Thursday seems to be coming off," said Jeremy Stretch head of currency strategy at CIBC World Markets.

Many analysts believe the EFSF, set up in May 2010, must be increased in size to build market confidence that the two-year-old 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 two months ago that would allow the fund to make precautionary loans to countries under attack and buy sovereign bonds to prop up struggling states.

Collateral Conundrum

With most economists saying a Greek default is inevitable at some point and the much larger Italian economy not out of the firing line despite parliament's approval of a new austerity package this week, the pressure is on to act.

A Reuters poll of more than 50 economists across Europe gave a 65 percent chance Greece would default with half of them saying it would do so in within 12 months.

Europe and the United States face 10 years of pain if a global solution for the euro zone debt crisis is not found soon, said former British prime minister Gordon Brown, an architect of the response to the world financial crisis of 2007-2009.

"Unless there is global coordination ... I foresee 10 years of low growth in Europe and America, I foresee very high levels of unemployment and I foresee a failure of coordination that will lead in the end to greater protectionism," Brown said at the World Economic Forum in Dalian.

Among the issues finance ministers will have to try to resolve on Friday is a row over the terms of a second bailout for Greece, with countries such as Finland demanding collateral in return for new loans -- a major obstacle to a deal.

"I think we are going to negotiate about it but unfortunately I don't see that we can find a solution tonight," Finnish Finance Minister Jutta Urpilainen said. "I'm optimistic that we can find a solution that everybody can accept."

Collateral is a must for Helsinki but officials say a solution is coming together whereby it is made so expensive to demand it that no country but Finland will take it.

[Source: By John O'Donnell and Robin Emmott, Reuters, Wroclaw, Pol, 16Sep11]

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