US’ Geithner to attend eurozone meeting as debt fears mount

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US Treasury Secretary Timothy Geithner will attend a meeting of eurozone finance ministers in Poland on Friday, as fears of a potential Greek debt default hit Europe's banking sector. Meanwhile, Germany and the EU are trying to reassure jittery markets.

The trip comes as a surprise since Geithner only returned only on Saturday from a meeting of Group of Seven finance ministers in Marseilles, where he said Europe's strongest economies must offer "unequivocal" backing to the weakest.

"The secretary will discuss with his European counterparts their efforts to contribute to global economic recovery and our continuing co-operation on financial regulatory reform," a US Treasury statement said yesterday (12 September). But US attention is focused on risks posed by potential European debt contagion.

The danger that a Greek debt default could roil bigger European economies was underlined yesterday as heavily exposed French banks' shares plunged and investor confidence in the euro zone's ability to surmount a sovereign debt crisis ebbed.

Underscoring concerns by the United States about the global economic dangers from Europe's debt troubles, the Treasury Department said Geithner would meet with International Monetary Fund chief Christine Lagarde on Tuesday.

Geithner's trip to Europe marks the first time a US Treasury secretary will attend a meeting of eurozone finance ministers. 

Bank shares plummet

Yesterday, shares in Société Générale, BNP Paribas and Crédit Agricole slumped more than 10% amid expectations of an imminent downgrade by credit ratings agency Moody's due to their exposure to Greek bonds.

The surprise resignation of European Central Bank Chief Economist Jürgen Stark on Friday and weekend comments by German politicians suggesting Athens may have to default and be "suspended" from the euro zone drove the euro to a 10-year low against the yen and a seven-month low against the dollar, though it later recovered some ground.

"Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved," said Makoto Noji, senior strategist at SMBC Nikko Securities.

The storm on Monday forced SocGen, the hardest-hit French lender in recent weeks, to announce further drastic measures it denied only last week were under consideration, speeding up asset disposals and deepening cost cuts to free up €4 billion in fresh capital.

The bank's market value has shrunk from €110 billion in mid-2007 to just €12 billion on Monday. The bank's chief executive said there were no discussions regarding possible state intervention.

Finance Minister François Baroin said French banks were solid enough to withstand any crisis in Greece and Bank of France Governor Christian Noyer rushed out a statement saying French banks were not at risk.

"There is no crisis for the banks because those that are currently being hit on the markets have all the necessary means to offer solutions," Baroin told reporters, adding that G7 central banks were committed to providing "as much liquidity as banks need.

French banks and insurers are not only the biggest foreign holders of Greek government bonds, both directly and through Greek subsidiaries, but are also major creditors of Italy, which is increasingly in the markets' firing line.

Moody's is expected to downgrade Italy's Aa2 sovereign rating this week, Richard Kelly, head of European rates and FX research at TD Securities said, noting that both Fitch and Standard & Poor's already had lower ratings for Rome.

The Financial Times reported on its website on Monday that Italy has asked China to make "significant" purchases of Italian debt. The chairman of the China Investment Corp headed a delegation to Rome last week following a visit two weeks ago by Italian officials to Beijing to meet CIC and State Administration of Foreign Exchange officials, the report said.

The second Greek rescue package in peril?

Greece resumed suspended talks with global lenders on a vital €8 billion euro aid installment after announcing a new real estate tax on Sunday to try to plug yet another gap in its 2011 budget deficit. Athens has only a few weeks' cash left.

EU finance ministers are scrambling to settle disputes over a second Greek bailout, including a spat over Finnish demands for collateral, in time for Friday's meeting in Poland.

The rescue package has been put in doubt by Greece's repeated missing of fiscal targets agreed with the EU and the International Monetary Fund, plus uncertainty over the scale of private sector participation in a bond swap and debt rollover.

Germany tried to douse the market impact of a string of weekend comments and media leaks suggesting Berlin is now assuming that Greece will default and working to seclude Athens from the rest of the euro zone.

Vice-Chancellor Philipp Rösler, who is economics minister and leader of Berlin's increasingly Eurosceptic junior coalition party, the Free Democrats, said there could no longer be any taboos to stabilize the euro.

"That includes, if necessary, an orderly bankruptcy of Greece, if the required instruments are available," he wrote in an article in Die Welt newspaper.

However, an economics ministry spokesman said on Monday no such instruments were currently available, and a government spokesman insisted there was strong agreement between Rösler and Chancellor Angela Merkel on the eurozone debt crisis.

EU will still grow 1.9% in 2012

Meanwhile, the Commission issued a forecast yesterday showing that the EU economy is likely to grow around 1.9% next year, roughly the same as this year, but Brussels urged those countries that have fiscal room to manoeuvre to use spending to support growth.

"The member states facing market pressures must continue to deliver on reaching their fiscal targets, and take additional measures if needed," Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

"Member states with fiscal room of manoeuvre should allow automatic stabilisers to function to mitigate the effects of a slowdown of the recovery on activity and jobs while sticking to their structural adjustment paths," he said.

EURACTIV with Reuters

 

Timothy Geithner's visit will be his first to a meeting of eurozone finance ministers. But it is not the first time he has tried to push Europe into acting more decisively to cope with its debts.

In March, he made a quick one-day trip to Germany just days ahead of a Europe Union summit to meet his counterpart, Wolfgang Schäuble, and to urge European countries to step up their efforts to handle the crisis.

He held a one-on-one session with Schäuble again in Marseilles on Friday, but neither side would talk about what was discussed during that session.

Meanwhile, EU officials have avoided any talk of budget offenders like Greece being kicked out of the euro zone but the Netherlands put the unwanted question firmly back on the table on 8 September, with proposals to appoint a new "commissioner for budgetary discipline".

The European Commission strongly rejected the idea, saying neither exit or expulsion from the euro area is possible according to the Lisbon Treaty.

 

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